From Seeking Alpha, is this the best investment in shale oil? This is a must read, not for investment purposes -- remember, this blog is not an investment site -- but to compare the situation now with past situations in the oil industry, as noted in the excerpt from The Prize below "the fold." [SA articles are often archived and available only by subscription. This article may be worth saving. A word to the wise.]
Don sent me the SA article linked above quite some time ago; I was traveling and only recently got back to it. And I'm glad I did.
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For The Archives
Meanwhile the oil market was responding to the phenomenal rise in prices over the 1970s and consumers' fears for the future. Yet the exporters were still unwilling to face up to the fact that that "objective conditions" of the marketplace were truly shifting.
They would not contemplate a price cut.
Prices were still in disarray, but finally, October 1981, they came to a new agreement.
Saudi Arabia would raise its price from thirty-two to thirty-four dollars a barrel, while the others agreed to bring their price down from thirty-six to thirty-four dollars.
So prices would be unified. When all the changes were factored in, the average price of oil on the world market would still, because of the Saudi increase, go up a dollar or two. For the other producers, the compromise did, of course, mean a price cut. Yet there were consolations. Saudi Arabia had agreed, at last, as part of the deal to go down to its old 8.5-million-barrel-per-day ceiling.
Iraq and Iran remained locked in bitter battle. Yet even a war between two of the most important exporters could only retard but not cancel out the powerful forces that had been set in motion by the two oil shocks.
October 1981 represented the last time that the OPEC price would go up, at least for a decade. The "divine laws of supply and demand" were already in motion to drive prices down, though not yet with the thunderous vengeance that was still to come. It was, as Yamani had said, as simple as ABC.That was the end of chapter 34.
Chapter 36: "The Good Sweating: How Low Can It [the price of oil] Go?
Chapter 36 includes a section sub-titled "Market Share." It begins:
In the first days of June 1985, OPEC ministers congregated at Taif in Saudi Arabia. Yamani read them a letter from King Fahd, who sharply criticized the cheating and discounting by other OPEC countries that had led "to a loss of markets for Saudi Arabia."
Saudi Arabia would not abide such a situation forever. "If Member countries feel they have a free hand to act," said the King, "then all should enjoy this situation and Saudi Arabia would certainly secure its own interests.I read this book years ago, but reading it again, is quite fascinating in light of the current situation.
If one has not read this book, you may not be interested in reading from the beginning, but certainly from Chapter 34.
By the way, and this was back in the late 1970s, this excerpt from the book:
Some companies like Occidental and Unocal, were already working on shale oil technology.
In 1980, Exxon, the world's largest oil company, looking ahead to what seemed the inevitable shortage, hastily bought its way into the Colony Shale Oil Project on the Western Slope.
Sixty years before, in another period of shortage, the company had acquired acreage in the same are to develop shale oil as a fuel. Nothing had come of it then.
Now Exxon became, by far, the leader, spending fully a billion dollars on shale oil development, getting ready for the "new era of energy."
Exxon had had a love affair with shale oil for a long time," recalled Clifton Garvin, the company's chairman. "It was a challenge, technically, and certainly economically."
Nevertheless, the country seemed committed to developing secure sources of liquid fuels. And the technology seemed available.
But over the subsequent two years, the economic outlook changed quickly and drastically. In real terms, the oil price was going down; so was demand. So were forecasts for both. Surplus production capacity was building in the oil-exporting countries. And, all along, the cost estimates for the Colony Project kept going up.
"We were looking at $6 or $8 billion for 50,000 barrels per day," recalled Garvin. "And there was no expectation that that was the end of it.
The next day, Garvin assembled a senior management team and asked what would be the consequences of stopping. "It was a tough decision. I rode that decision."
On May 2, 1982, Exxon announced tersely that it was terminating the Colony Project. Nothing that the company now saw in the economic outlook could make the shale oil project viable.
The boom on Colorado's Western Slope ended literally in hours, as work came to an instant stop.....now, in three towns in Colorado, newly built homes were empty; weeds quickly covered landscaped lots; half the apartments went unrented; construction workers from the Midwest packed up and headed home; traffic evaporated from the roads; and teenagers with nothing else to do took to vandalizing the partly built homes and office buildings.The very next paragraph is incredible, but I have to stop somewhere.
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For The Granddaughters
Yes, it was posed.