The "Market Rebalancing" Fairy
It bares repeating. OPEC are the low cost producers. Many like to suggest that’s not the case when you consider that Saudi Arabia is running a budgetary deficit with the current prices. The costs of maintaining that society through their oil revenues makes them the high cost producer. Then to make it comparable, the debt and deficit of the U.S. and Canada should be added to the costs of our production. That would make the costs directly comparable. If we however are looking only at the operations, capital and overhead costs, OPEC is the low cost producer.
The BP Chief Economist made some comments a few months ago that should be reviewed and considered at this time. These comments reflect that the current surplus production and inventory issues are not a temporary thing. The world now has enough oil to supply the demands for the next 33 years, twice over. He suggested that this may change the way that low cost producers see the market. Instead of leaving the oil in the ground for later, they’ll produce it now at whatever price they receive, and at least generate some revenues from their reserves. As the low cost producers OPEC can do that. The North American producer is unable to compete in that marketplace as they are the high cost producers and they have to base their operation in the financial markets. Now more than ever the North American producers need the Preliminary Specification which enables them to identify the profitable properties and shut-in those that are not.
I see the situation today as coming close to being played out. Why is it only OPEC’s responsibility to cut production? If you look at this from the point of view of OPEC, and the political hand that they’ve played here, it appears to me that they’ve now turned the focus to the North American producers as the prime culprits of the overproduction and oversupply problems. They’ve done everything that they can to deal with the problem and the shale producers are racing in to fill the void from the production cuts that OPEC is making. How much longer will OPEC continue to cooperate and reduce their production in this environment? At what point will they say there’s no dealing with the situation and just employ the strategy that the BP Chief Economist says is the logical choice in an oversupplied environment such as this?
Market rebalancing is a myth, just as the moon is made of green cheese. Markets are defined by supply and demand and provide information in the form of price. That is all that markets do, they do not “rebalance” or do anything on their own particularly in the face of continued, chronic overproduction. They do not offset the stupidity of chronic unprofitable overproduction. They provide price information and that is it. Nothing else. If producers can make a profit at the price that the market is offering then they produce. Otherwise producers don’t produce unprofitable production. Markets don’t act, producers act. This is how each and every business operates in the world outside of oil and gas. You don’t produce unprofitably. It destroys value. It reduces your profitable operations. It’s foolish. Yet we continue on in this foolish manner of producing oil and gas unprofitably, expecting lower cost producers to shut-in their production because they should, and waiting for the myth that the “market will rebalance.” It’s as if some oil and gas fairy, the “market rebalancing” fairy is going to come down with her magic wand and make it all better for the North American oil and gas producer. Yes, producers you do look that ridiculous.
The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.