Friday, June 01, 2012

Energy Milestone: Gas Rig Share Falls Below 30%

In response to natural gas prices falling to inflation-adjusted multi-decade low levels over the last several years, along with high oil prices, there has been an ongoing switch in drilling activity from natural gas to oil, as can be seen in the chart above of rig shares.  Now a new milestone has been reached.  For the first time since Baker-Hughes started tracking the rig split between oil and gas in 1987, the share of active rigs drilling for natural gas fell below 30% last week and the oil share rose to a new record high of 70%.

Economic Lesson(s): Prices transmit information about relative scarcity.  Incentive matter. Producers respond to prices and incentives.  Through the invisible hand of the market and the motivation of profit-maximization, producers are naturally switching production from relatively abundant natural gas to relatively scarce crude oil.  It's a good example of market forces at work, re-allocating resources through "spontaneous order," without any need for central planning.     

2 Comments:

At 6/01/2012 2:16 PM, Blogger VangelV said...

Economic Lesson(s): Prices transmit information about relative scarcity. Incentive matter. Producers respond to prices and incentives....

True but you forgot that the shale gas producers kept drilling and drilling even though they were losing money. The move to 'shale liquids' may be profitable for a few of the better locations in the core areas of the best formations but at current WTI prices most shale oil is not profitable.

So why are the companies still drilling for shale liquids? Well, incentives do matter. If the leases are written down most shale producers would be bankrupt. Management is hoping that a liquidity injection by the Fed saves the day but still benefits if the game can continue for as long as possible.

What I found ironic is that this scam is making it possible for the Chinese to buy conventional oil assets from European companies that made lousy bets and have to way to add more debt.

When you see PetroChina buying up conventional fields from US producers you know that the credit contraction is making it hard to keep the game going.

Through the invisible hand of the market and the motivation of profit-maximization, producers are naturally switching production from relatively abundant natural gas to relatively scarce crude oil.

What BS. The producers are trying to keep the game going and can no longer hope to fool anyone with their shale gas stories. Anyone who has looked at the production data has reasons to doubt that there is much profit in shale liquids at current prices.

It's a good example of market forces at work, re-allocating resources through "spontaneous order," without any need for central planning.

In a free market there would be no shale scams possible to pull off for very long. This scam is only possible because analysts refuse to point out how lousy accounting rules, SEC rules, and the Fed have managed to blow up yet another bubble.

 
At 6/02/2012 8:17 AM, Blogger BBL Jr said...

I fail to see any scam in the thousands of new jobs, the billions in savings to utility customers, and to the improvement in the US balance of payments that will slowly develop once we are exporting some of the LNG to countries that need the supplies.
Where I do see scams is in state gas taxes that clsim for or 5 times as much net revenue from gasoline sales as do the producers of the gasoline. The big evil oil companies run on profit margins below 10% but no one complains when Apple or Starbucks charge profit margins of 40 or 50%.
This is no scam and thank goodness for the economic boost consumers have received from shale based production. Shale has produced a lot more jobs than the government has and done so without confiscating taxpayers savings.

 

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