Falling Oil Prices – Look out below?

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Oil prices - where will they stop?
Oil prices – where will they stop?

As Brent Crude, and West Texas Intermediate (WTI) – oil, falls below $60 a barrel, this is having, and is likely to have, a devastating effect on economies the world over.

Russia’s currency today (16th Dec) went into free-fall, even as on Monday, the Central Bank of Russia raised interest rates to 17.5%.

The last time that I remember any country doing that, was in 1992, as then Chancellor of the UK Exchequer – Norman Lamont raised interest rates to 15% in an attempt at keeping the British Pound in line with its commitment to the European ERM (Exchange Rate Mechanism).

On that particular day, one George Soros reputedly made a billion dollars as he bet against the pound, as it plunged on international currency exchanges.

Britain, spent a fortune trying to defend the currency against the speculators. But, all to no avail. And as a result, house prices went into freefall, and the economy followed, finally emerging in 1998 as spending on technology which was forced spending to replace all computers, operating systems and application software before December 31st 1999 with 32bit versions, to enable 4digit years to be processed correctly, created a mini-boom in the tech sector, and ultimately led to the tech-crash that ushered in the new millennium.

The only other time, that anyone raised interest rates that high, was in 1980, as the incoming Chairman of the Federal Reserve in the Reagan administration – Paul Volcker, raised interest rates to 15% to choke off inflation which had peaked for a second time in a decade at over 20%, after oil prices climbed to $40 on the back of the Iranian Revolution led by an islamic cleric who returned home to Iran from Paris, after the Shah, was chased out of Dodge.

The cleric, was none other than Ayatollah Khomeini, and his religious fervour, and biased interpretation of religious texts, ultimately led to much of the unrest in middle-eastern politics in the decades that have followed.

But we’re here to talk of politics, finance and economics, not theology.

Oil both sides of the Atlantic is falling.
Oil both sides of the Atlantic is falling.

However, as oil prices have fallen, the economic fall-out is spreading far and wide.

America has invested heavily in shale oil and gas extraction. To many commentators, much of the country is like a pin-cushion as numerous holes have been drilled almost leading America to be number one supplier in the world, by 2017. But much of the investment capital has been borrowed at historically low interest rates as the Fed has fought deflation, and the investment, has been premised on oil at over $90/barrel.

If oil prices continue at these low levels for any length of time, the economics of this oil extraction will be turned on its head, as shale wells, tend to peak in output and fall to nominal levels within one year, requiring a constant flow of new cheap capital, and expensive oil to make it all work.

With OPEC agreeing to not cut output, one has to wonder if this was at the request of the U.S., to punish Russia, or whether the fact that the U.S. has recently been cosying up to Iran, who have been selected by the White House’s residents as the regional hegemon and perhaps ruffled the feathers of the Saudi Kingdom and who have turned on their historical protectors.

We can only speculate.

And if oil prices remain in the doldrums, those American Corporations who are more higly leveraged, will succumb first, leading to lay-offs.

As many of those people are highly skilled and highly paid, this will have a knock on affect in local economies where these businesses operate, meaning hotels, restaurants, gas-stations, and service providers such as cleaning, food, hairdressers, bars, brewers and the like all suffer. This will mean fewer car sales, and fewer vehicles manufactured in already stressed American, and European manufacturing centres.

The ripples are like those on a pond, when a pebble is tossed into the water. Each ripple spreads and affects all those suppliers of goods and services in their turn.

Once Xmas is out of the way, the downturn will perhaps resume in earnest. Just as rumour has it, that the Fed at the FOMC (Federal Open Market Commitee) will meet to discuss interest rate rises at the end of January.

But they may be forced to raise rates, as reports arrive of an impending COMEX default surface, as precious metals head east into the land of the rising superpower – China.

And don’t forget, you can protect yourself and learn a lot more about the reasons for the current crisis HERE…

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Before I go, I’d like to tell you about a junior oil producer, that has an agreement with the national oil company – PETROTRIN (Petroleum of Trinidad and Tobago) to supply oil at certain royalty rates on a sliding scale as WTI prices vary.

The Company LGO Energy, took over some oil fields in south-western and south-eastern Trinidad and Tobago, in 2011, with the intention to use the exploration as a way to gain experience of the area, which had not been drilled since the 1980s. The agreement was to drill and clean up circa 90 existing wells, and to drill 30 new ones. The company ordered and installed a series of pump-jacks – Affectionately called “nodding donkeys”, and this had a dramatic affect.

Pump Jacks
Pump Jacks

When LGO took over the fields, the existing wells were producing in the region of 5 barrels of oil per day, and LGO expected to achieve circa 30-60 bopd (barrels of oil per day) after cleanup. LGO were surprised to learn that after clean up, many of these wells far exceeded expectations.

The company also began its new drilling campaign, and after drilling from new pads (A pad is a cluster of wells drilled from one location on a concrete base, but deviated so that they access different oil patches) After two pads, LGO were achieving 200+ bopd from each well, but restricted flow rates so that they didn’t damage the field, and flow would continue for longer.

However, a recent drilling campaign on Pad 3, blew away expectations by flowing at an unrestricted rate in excess of 6,000bopd. But, in order to minimize well damage, and because of limited storage capacity, flow has been restricted to circa 1,000bopd. The Chief Executive – Neil Ritson, hinted in an interview also, that the 2 other wells drilled from the same pad, had similar characteristics, suggesting that when they officially release newsflow in an RNS (Reuters News Service) this will be a game-changer for this tiny oil company.

At less than 4p for a share of this company, on the UK, AIM index, this could be an opportunity to make a considerable contribution to your pension fund. The CEO, has serious plans to expand on and build a mid-tier oil production company. I have no problem with seeing potential prices in the 20-30p range within 2yrs, and more within 5yrs.

This is not a solicitation to buy, but merely information to begin your research and for education purposes.

PS:.

After posting this, I came across a video on line, that discussed the recent fall in oil prices, and the likely outcomes by people who have either a history of discussing such events, or in the case of Dr. Paul Craig Roberts, who was Assistant Treasury Secretary in the Reagan Administration.

I hope you like it.

Have a great Christmas, it may be a while before you have another.

W

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