Those landowners who were lucky enough to have experienced $100 bbl oil are surely not very happy with today’s crude prices. I dare say that many royalty owners who can afford it are wishing that oil companies would just leave the stuff in the ground until the day comes when oil reaches $100 barrel again. Of course it would be nice to see $100 oil return, but unfortunately it’s probably not going to happen for a long time. Those small family farmers and ranchers who now depend on monthly royalty payments to help make ends meet would probably like to see checks keep coming, even if they might be less than half of what they were before the oil crash.
Oil prices might stay low for a while because of Iranian oil flooding the market as international sanctions are lifted, by a large “fracklog” of drilled but uncompleted shale wells coming online, increased Saudi, Russian or Libyan output, further slowing of the world economy, new energy technologies offsetting oil use, or a host of any other reasons. Oil could also go back up as T. Boone Pickens predicts but he’s been wrong many times over the past decade. It could, as some experts suggest, stabilize in the $40-$65 range for a long, long while.
With the huge pullback in the rig count and cuts in CAPEX by most oil companies, it sure seems like the price of oil should rebound, but when? If the increase in oil price a landowner were to realize in one or two years time was only $10 per barrel, then perhaps one should consider what economists call the “opportunity cost” to see if it’s really that beneficial to “keep it in the ground,” as if they had a choice.
Investopedia defines opportunity cost as “the cost of an alternative that must be forgone in order to pursue a certain action,” and the difference in return between a chosen investment and one that is necessarily passed up.” Since most mineral owners don’t have a say in when or how much oil their lessee produces, opportunity cost is sort of a moot point, yet thinking in these terms might at least be comforting during these tough times.
For the landowner the opportunity cost of leaving the oil in the ground could be a factor, depending on their financial situation. Assuming we don’t see $100 for a long while, and that the increase between today’s price and next years is $10, to $50 bbl, then at today’s $40 bbl oil that’s a 22% difference. Of course that’s a significant difference, but not so much if there are opportunities for that money to be used in the present.
A Landowner might be able to put that money to better use elsewhere, even if it’s less than what they might get in a year or two, (a bird in the hand.) This is true especially if they have any high interest personal or business debt. The longer the span of time before prices recover, the more the “cost” to the landowner grows to leave oil in the ground, again if they had any say in the matter, and we don’t. As for many oil companies who may be carrying too much debt, they must continue to take the “bird in the hand” and allow wells to produce, rather than choke them back and wait for higher prices.
Looking at the 10 year crude oil price chart below, we can see that we’ve been here before. A spike in the price spurred more drilling, causing an oversupply of oil which occurred just as there was a downturn in the economy. The climb back up might just take longer this time because of of the reasons listed above and because shale drillers are becoming so much more efficient at producing oil.
I’m sure not everyone out there will agree with me. I just wanted to throw this theory out there to help some landowners (including myself,) feel a little better about the current situation.
I’d personally like to see oil companies in the Eagle Ford choke wells back a bit, and I believe that it’s already happening. In a small way though, the Eagle Ford Shale producers are now in the same basket as the Saudi’s. If they let up in production, coastal refineries will just get the oil they need from Cushing instead. Right now market share due to oil quality and logistics is one thing the Eagle Ford Shale play has going for it and oil producers know that. Let’s hope the oil market will turn around soon, for the benefit of landowners across the US, as well as the hardworking men and women of the oil and gas industry.
Submitted to the site by Craig Blankenship. Guest Contributor)