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Column: Saudi Arabia and New Mexico: oil price threat By Dr. Daniel Fine

For the complete article in the Farmington Daily Times use this link-->


The shale oil boom which returns 25 percent of the New Mexico State revenue is under "bust" threat from Saudi Arabia.

The current price decline in both midland Texas light sweet crude and brent (world price) will begin to defer future projects if prices fall to $72 a barrel and below. An estimated 80 percent of production and projected production in the next five years requires price stability higher than $ 75 per barrel. Saudi Arabia is combining market share strategy with a world oversupply of crude oil.

Oil producers in New Mexico are partially protected through cash flow hedges, which are crude barrels sold forward with prices established in futures (must be higher than present prices). However, no more than 50 percent of production is estimated to be hedged or protected in 2015. The other half must be sold at whatever the market (West Texas crude) price will be. An oil company can hedge 2016 production at $79.00 per barrel compared to the current hedge protection of $95.

Decline ratios (rate of recovery after initial production) are high. Massive drilling of new wells for replacement is the economic challenge. At least half of the new shale or light sweet crude oil production from the Southwest to North Dakota through the Rocky Mountain energy corridor is at risk.

This effectively limits the 10-year-old shale oil technology play and consequent "energy revolution."

The shale oil or light sweet unconventional oil boom is the target of Saudi Arabian oil strategy which is market share. This rejects production cuts in response to weak demand and prices. Defense of market share coupled with falling world oil demand accounts for a global price fall of 25 percent since July.

The timing of the Saudi action has hit the Southwest U.S. unconventional oil producers when they are already vulnerable to a massive infrastructure bottleneck. Producers have confronted a discount price of as much as $15 per barrel because there is not sufficient pipeline take-away capacity from the Permian and San Juan basins to refineries on the Gulf of Mexico coast or anywhere. This is the result of unanticipated high oil production without investment in transport to get it to markets or process it here in New Mexico. Stand-by rail transport is costly and trucking is competitive with rail. New pipeline and refinery capacity is required in New Mexico and Texas.

Strategic market share is the Saudi Arabian counter-attack upon the American shale-oil and gas-supply revolution which threatens Saudi exports. Saudi ARAMCO is reacting to the rise of American oil production as a threat because of the demand to lift the 1975 prohibitions against American crude oil exports.

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Replies to This Discussion

https://www.youtube.com/watch?v=ynAAXzs3PUY    I hesitate to post this because some of Dr. Willie's ideas are too over the top for me. The oil part is ok up to about eighteen minutes. The rest-I hope things aren't that bad. Trouble is West Texas has become very important on the world stage.

http://www.zerohedge.com/news/2015-01-11/bofaml-bullish-bonds-black...   Then here is a new piece from Bank of AmericaMerrillLynch. I have posted a few things leading to my "isn't right." I certainly don't have it figured out. Thing is, we are imo facing uncertain times perhaps like 2008. I have a responsibility to care for and protect the land and minerals (oil). I won't get what I need from Yahoo Finance, CNN, or other charlatans. I have no control of operations since I am a royalty owner, but if I had my way the wells would be pinched back to 3 bbls. per day just to hold leases. Natural gas is tough also-frigid weather everywhere and gas can't even make 3.00 Dollars. More will come as things develop.

Gold? Read a few days ago on ounce buys 25+ barrels of oil. Oil or Gold is out of whack, one has to give.
 More links above  John Allen said:

Do you think that there's any significance to rising gold prices?  

I don't work in finance and I have only a rudimentary understanding of HFT terminology.  I think I get your drift that gold and oil aren't lockstep.   But it does seem that gold and oil both have risen slightly over the last few days.  I'm still trying to understand what you think isn't right...or more, what's your theory of what is behind what isn't right?

That seems like a crappy article to me.  For example, a country heavily engaged in active exploration of new prospective fields is going to have a much worse rig to production ratio than one which has forgone new development and is just pumping established fields, right?

I am not too concerned about the 'decline of the US empire'.  Long before that became a reality, the USA would just annex Saudi Arabia and take all their oil.  When you're the biggest bear in the woods, you don't go hungry.


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