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from there they will regain the leading foothold (barring red-tape) and end the paradigm of selling prices that reflect deep drilling in the sand dunes. Let’s move on to the inevitable OPEC breakup. Credit where credit is due- they have survived a long time in “unity”. I mean that despite the totalitarian imposition of member cuts, exclusions, and market share divvying. I subscribe to the belief that the current overproduction especially by Saudi Arabia is in response to the advances of fracking technology and highlights the fear and possible paranoia of producers as to what is to come next. The oil industry is changing, and it will be interesting to see the members begin to eat each other as the pie shrinks. This is the current state of crude, producers competing in the all sinking “game theory”. March prices lower, gather and protect market share from the competitors, and screw the consequences! But without moving on, I have to make mention of the existing chaos going on within the region and speculate this will all come to head in a multiplicity of detriment. Extrapolating that dismal outcome, I have to believe that this will be the straw that broke the camel’s back, ending OPEC coordination. The 30 year bull bond market has staged a reversal, at least at this point in time. So will yields reverse course from their low of 1.36% on the 10 year bond, back to their glory days in the early 80’s of 14% & 15%? With central bank intervention who knows? But this isn’t a bullish piece on oil prices, so let’s assume they will go higher without putting a ceiling on it. This is going to raise financing costs for everyone, including oil producers who are refinancing their liabilities. Those interest costs are little deductions from the EBIT on the income statement, but they also represent an expensive capital structure with bank covenants that have a hand on the balls of the cash flows and current ratios – that means increasing production to supplement the top line revenues. I think I already covered supply and demand, but yeah excess supply isn’t good for prices. So let’s end on some fundamentals of both horizontal drilling and historical crude prices. Why the fuss over horizontal drilling vs. previous vertical? It changed the paradigm for oil extraction. Projects that yielded oil from a single hole with expensive drilling and extraction equipment are now able to drill 25 additional horizontal holes with nothing more than water and mineral mixture. For a lean vertical project the AISC (all in sustaining costs) per barrel would hover around $40-$50-, but when we flip the landscape horizontally the overhead drops to around $10 -$15 per barrel. Producers under this environment can afford to float lower prices for competiveness. This will increasingly alter the sentiment of how crude is traded and will help ride us to that $5 spot price neighborhood. But we just had $100+ oil-per-barrel in 2014? If we take a look in the rear-view mirror we’d see that from 1946-2017 the mean spot price for crude oil was $24/ barrel. Furthermore, from 1893 to present, prices of oil have been below $15/ barrel almost half the time. I think I laid out my best and most compelling case for $5 oil prices, before $250 by the year 2050. Of course, tailwinds for oil prices will always be overreaching Governments of net exporters. It’s hard to imagine what a socialistic Venezuela or authoritarian Saudi Arabia would be without their vast natural resources, and I have no reservation that they will bring their most desperate efforts to defend their paycheck. But I wouldn’t bet my money on their efficacy. Right or not, at least I can say I wasn’t cheerleading a dead-end, hoping to make a fortune long crude oil.

Florida Scholarship Winner Trey  
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