John Mauldin is in dire need of an editor. He writes like three of these a week and they're ALL long (potkettle, I know). But this one is worth reading. Some choice tidbits:
- Add in the further complication that shale oil fields, by their nature, are easy to turn on and off. If your oil costs $40 a barrel to produce and you can sell it for only $35, you can cap your wells and wait for higher prices. But here we hit another problem.
If you borrowed the money to drill your wells in the first place, you need cash flow to service your debt. So you might keep pumping even if you only break even or run a small loss. That seems to be what many small US producers are doing. The alternative is to default on their bank loans or high-yield bonds.
Indeed, the high-yield bond market seems to have calculated that more defaults are coming. Bond prices have collapsed as low oil prices make it hard to stay current on debt payments.
- According to scientists’ computer models, the US could reduce its carbon emissions up to 78% below 1990 levels by switching to mostly wind and solar energy and modernizing the electric grid’s architecture. We would still need natural gas and hydroelectric and nuclear power for times when the weather was uncooperative, but the need for them would be sharply lower.
This particular study might or might not be flawed; but the point is that oil, gas, and coal face serious competition from other energy sources. Meeting electricity demand with renewable sources might be closer than we think. That still leaves transportation, though.
- ’m in a hedge fund conference in the Cayman Islands today. I was talking with some rather large (think tens of billions) managers last night. When you look at the really long term, as in 40–50 years, these guys think the price of oil goes to almost nothing, as we will have so many substitutes for fossil fuels, and we’ll find lots of oil that can be brought up for not all that much money.
How can that happen? If I buy producing wells out of bankruptcy at $.10 on the dollar, then my cost of production just dropped by 90%. I know, I know, it can’t happen, right? Think Global Crossing. They laid thousands of miles of fiber optic under the oceans at immense cost, which auctioned off for pennies on the dollar. We should all be grateful to those unlucky investors, because they are why you and I can now enjoy cheap Internet and telecommunication prices. Why should oil be any different?