America’s Energy Outlook Is Fracking Great, For Now

So what could go wrong?

Mae West famously said, “Too much of a good thing can be wonderful.” While all this oil and gas has been a wonderful boon for post-recession America, could there be such a thing as too much of it?

Boone Pickens thinks so. “We now have too much oil,” sighs Pickens. At $93 per barrel this week U.S. crude has fallen $13 per barrel since June.  And that price is what you get at trading hubs, not out in the field.  “Midland oil [from west Texas] can only fetch $83. That’s $10 below the market price. If the price gets below $80 they’ll lay some rigs down” and stop drilling.

Why the big discount? Because as fast as they’re building pipelines and rail spurs to get the crude out to trading and refining hubs, they’re not building fast enough to keep up with the drilling rigs.

Natural gas prices are under pressure too. Six years ago U.S. drillers were running 1,300 gas rigs. Now that’s down to 300. “We found too much gas,” says Pickens. “2015 is going to be bad for gas,” says Pickering, meaning that prices should be heading down from current levels of $4.50 per thousand cubic feet. “You don’t make money in $2s. You make a ton of money in the $5s.”

Present at the event Tuesday was Gary Evans, CEO of Magnum Hunter Resources MHR +9.89%, which is drilling what he calls the “heart of the heart” of the Utica shale in Ohio. The Utica and neighboring Marcellus shale of Pennsylvania are proving to be so prolific that they’ve dried up interest in other giant shale gas fields. “The Haynesville, Barnett and Fayetteville don’t work at $3 gas,” says Pickering. That’s especially the case when so much of our natgas supply is coming as so-called associated gas, produced alongside oil in the Bakken, Permian and Eagle Ford. Says White: “So much gas is a byproduct. When something is a byproduct the marginal cost is zero.”

The average Joe should welcome lower prices for oil and gas, right? After all, cheap energy should spur broader economic growth outside the fracking fields. And soft prices gives the pipeline and petrochem builders some time to catch up, right?

Don’t tell that to the oil and gas companies. Tens of billions of dollars in market capitalization is contingent upon  oil companies maintaining growth. They have to drill fast enough to hold their acreage before leases expire. At the same time, they have to get their volumes up high enough that they can generate enough free cash flow to pay back their debt. If you can’t drill economically it all unravels.

Pickens understands this intimately. In 1996 his Mesa Petroleum had taken on too much debt while betting that the price of natural gas would go high enough to return the company to profitability. It didn’t, and in 1997 Pickens had little choice but to sell Mesa to a stronger rival and walk away.

It even happened to his Dad. In 1931 Pickens’ Dad had a small oil company. But it went out of business after the discovery of the East Texas oilfield drove the price of oil down to 10 cents a barrel. Dad “couldn’t stay alive” because he needed 50 cents a barrel to make money.

No matter what era you’re in, when excess oil floods the market it will wipe out the little guy.

Pickens is drilling on his own ranch up in the Texas panhandle. “The sad thing is I’m 86. I’m not gonna see another 20-30 years of this,” he says. “I may get 20.” The audience laughed.

via America’s Energy Outlook Is Fracking Great, For Now.