Supply & Demand
Sarge: I appreciate your responding in a rational, thoughtful manner. I'd like to make a few comments about your analysis.
<<ASSUME: "You have ten oil wells producing 20 barrels of oil per day with proven reserves of 3m Barrels (41 years @ current levels of production). Assume also, that the revenue is almost your sole source of income now and for years to come and forces beyond your control drive the average price from $20bpd to $12bpd because the consumers only need 180bpd of your 200bpd production.
QUESTION: "What do you do?"
SUGGESTION: "You might shut down 3 of the wells leaving you with daily production of 170bpd (10bpd less than the consumer presently needs)." The effect of this alternative action would be to increase the price back to $20 or more and extend the life of your reserves from 41 years to 48 years+ and increase your current daily income from $2400 per day (200bpd * $12.) to $3400 per day (170bpd * $20).>>
<<An analogy, if General Motors has the capacity to produce 100 vehicles per hour, but is currently selling only 95 and the production of each vehicle over 95 is driving the price down and reducing profit margins, what do they do? The answer is obvious and in my opinion no different than that from producers of energy.>>
I believe your analyses, while thoughtful and sincere, contain an important flaw. They assume that one player, making unilateral cuts, can restrict supply of a worldwide product and dramatically increase the market price. In a perfectly static market with a single monopoly, this would be possible. However, the market is not perfectly static, and there are thousands of players in the game. In a dynamic, multi-player cartel, while it is in the entire group's collective best interest to restrict supply through the use of production quotas, it is in the individual participants' interest to cheat by overproducing. Furthermore, it is in the cartel's collective best interest to announce cuts before the meeting, but the simple truth is that an announcement doesn't equate to actual cuts.
IMO, only when actual cuts happen, and excess supply (defined as total supply minus total demand) gets truly drained from the market, will the fundamentals supporting a real, long-term price rise (rather than a sentiment-driven price rise) begin to drive the economics of this commodity business in the direction that most on this thread want.
Just a few weeks ago, I was skeptical in the short-term, but willing to go long when the fundamental outlook (specifically, the supply/demand imbalance) improved. So far, IMO, that hasn't happened. The recent price rise has been driven mostly by sentiment and OPEC posturing, making the short-to-medium term investment horizon for oil service stocks even more precarious.
JMO, of course. Since I appear to be one of the few bears left on this thread (at least in the short term), I expect to be pilloried for my views, but I'm willing to discuss the matter with all interested parties.
Razor |
