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A Revolting Development

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The price of crude dropped like a rock when OPEC failed to take any action last weekend. This was no surprise but a dip back to $47.06 Wednesday morning is definitely a revolting development.

I have said it here many times recently most producers today need prices well over $50 to make a profit. With crude still falling and some TV analysts calling for a dip into the high $30s there will definitely be a price to pay in the future. Today it is nice to pay $1.58 for a gallon of gas in Denver but this is going to lead to much higher prices in the future.

We have already heard about dozens of projects being put off or even cancelled because of the low price. At last count it was something over 70 projects. These are projects where the marginal cost of oil is well over $50 or even $60 a barrel and it just does not make sense to spend millions, if not billions on some, and not be able to make a profit when complete.

Unfortunately as the IEA said in their recent report depletion has accelerated to as much as 9.1% annually. With current daily production at 87 mbpd that means we are losing between 5 and 8 million barrels per day per year to depletion. That means we have to discover and produce that same amount of new oil just to stay even. With projects being cancelled at a near record rate the amount of new oil coming online in future years will be impacted dramatically.

With gasoline well under $2 there is no money in refining. With crude at $47 there are some old reserves which are still profitable but anything discovered and produced today at today's rig costs, high labor and sky high pipe and seismic they can't touch $47. How much oil would you produce at $60 to sell at $47?

Once the price rebounds back over $60 for several months those projects will get scheduled again but they lost their position on the rig scheduling and availability calendar and it could be 2-3 years before their turn comes around again.

Enjoy the cheap gasoline because it is not going to last forever.

Jim Brown

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