Responsible Production for Longer Term Price Stability
The Shale producers are the bad guys here, they are the rogue diamond mining operations in Africa bringing on additional supply that disrupts the entire market which threatens not only their own existence, but the more established players in the industry. The solution is simple, buy them up, stop their production, shelve it until oil inventories come down, and boost oil prices to more long term sustainable healthy levels. This makes for responsible long term investing in the oil market which is in everyone`s long term interest for a stable oil price. Bring back new supply from shale operations as the market can bear it based upon actual oil demand in the market grounded upon global growth. As global demand picks up, you bring more shale gradually to meet this new demand.
Shale Oil is Peak Energy Demand Solution
There is a place for shale oil as we have seen OPEC is pumping near max capacity and it looks like it is around 33 million barrels per day. Think of Shale oil as the peak oil supply when demand or inventories are low to bring online to deal and handle peak demand conditions and then go offline as the market dictates like natural gas used to be in the electricity market. Let OPEC and traditional oil supply be the baseline provider of the market, and shale to provide peak demand or as the market dictates.
For example, if global demand picks up and can handle the US pumping 10 million barrels per day, then fine shale can pump away and be part of the baseline supply. However, that is not the case currently, and it makes rational sense to adjust to market dynamics and take shale offline until U.S. Inventories come down, oil prices rise, demand picks up and the overall oil industry is on more stable long term footing. It hurts the big guys just as much as the little guys if you think of the entire cost/benefit analysis of tanking the entire oil market – just look at the mining industry for similar results.
Cut US Production to 6 Million Barrels per day
The only solution is to cut oil production, the US Producers need to buy up the smaller ones, take production offline, so that rational decisions can be made for the market as a whole, because currently it is rational for the hangers on in the shale industry to do the irrational for the overall market. You buy them up, and now it is in your rational best interest to take this production offline, bringing US Production down to 6 million barrels per day. Quit worrying about what OPEC does, get the $15 worth of shorts off your main revenue producing commodity’s back, all the while bolstering up your cratering by the moment revenue numbers.
Control Your Own Destiny
Now the correlation in cutting supply is in your best interest as you the Exxon Mobil`s of the world have added to your shale reserves, boosted quarterly revenue by boosting oil prices, and are rationalizing the market by reducing existing oil inventories- the interests are aligned.
Consolidation, and major consolidation happening right now is the only viable solution for solving the problems of the oil market, now get to work and start negotiations. I expect to hear some acquisitions over this first quarter now that I have given you the blueprint for solving your problems. You can send me a Christmas card as a thank you note, given that you are too unwise to get this on your own, or you would have already started acquiring assets and reducing supply 6 months ago.
I am not a big fan of waiting for things to happen, I like to be proactive and make things happen. In my book this is the preferred strategy course, and the Major Oil Executives need to start making things happen in a proactive fashion right now. As a result, cutting production needs to happen tomorrow, not waiting for the marginal shale producers to fall by the wayside, think how much quarterly revenue you have already lost by employing this sit on your collective asses’ strategy for all of 2015!
This article is brought to you courtesy of EconMatters.