The condition of the economy has a lot of people
wondering what possibly could happen next. Many industries and market sectors
are on the skids, but one industry that has a pretty rosy future is the
drilling industry. Of course, there is an upside and a downside to all of this,
and so many factors drive and affect our business that I think a little
examination of the cause and effects might help.
Everybody who doesn’t ride a bicycle to work knows that the price of gasoline
has gone up. A lot. I’ve received emails and comments from friends saying that
we should boycott this station or that oil company. Let me tell you something:
The stations – or, for that matter, the oil companies – don’t set the price.
First, oil is a world-wide fungible commodity. What the heck does that mean? It
means that oil is sold auction-style. If you boycott the auction, there still
will be other bidders. Such as the Chinese or the Indians; they need it for
their growing economies, and are willing to bid a lot to get it. If you want
some, you have to bid.
Second, the price never will permanently fall below the costs of production,
plus taxes. We already have drilled up and sold all the cheap oil. The oil we
have left is harder (read: more expensive) to produce, and is found in
increasingly hostile places. The third major factor affecting oil prices is
inflation. Simply put, since the value of the dollar is being driven down to
hide our government’s inability to lead, and with the high costs of
vote-buying, it takes more and more dollars, worth less and less, to fill your
tank.
The last time we saw this was during the Carter administration. Per-barrel
prices were high, the rig count was high, and business was a-booming. A lot of
us made some pretty good money back then. Then inflation caught up with us,
same as it will do again soon. To understand real prices, look at how many
hours of work you have to do to fill your tank. Then think back to most any
historical time period, and you will find that it is not much different. Sure,
there are peaks and valleys, but the overall trend is the same. Consider this:
In 1913 (the year the Federal Reserve System was formed), a $20 gold piece
would buy a hand-tailored, three-piece suit of the finest materials. Believe it
or not, it still will. The problem is, as of this morning, it takes $1,419.50
worth of paper dollars to buy that $20 gold piece. The value of the suit hasn’t
gone up, nor the value of the gold piece. The value of the dollars has gone
down. And will continue to do so.
Another factor influencing the drilling industry is the environmental movement.
In the past, the energy industry has used some procedures that weren’t our
proudest moments, but that has changed. Drillers now are some of the leading
stewards of the environment. And they do it with common sense, instead of
hysteria. Our cutting-edge technological advances have made it possible to
cleanly and safely drill in places unreachable before. For example:
The advances in hydraulic fracturing have made production possible in
formations that used to be looked at as nothing more than an unproductive
nuisance. In spite of propaganda movies like Gas Land
and others, not one water well has been proven to be damaged by hydraulic
fracturing. Don’t believe me; this is according to the state regulatory
agencies that watch that sort of thing. And in places where there are
complaints, drillers have gone out of their way to be good neighbors, and
provide replacement wells, water lines or treatment equipment for perceived
problems.
There are places where environmental (emphasis on “mental”) issues have pretty
well stopped drilling. Look up a map of the Marcellus Shale. This huge
natural-gas play is spread over several eastern states, i.e., Ohio,
West Virginia, Pennsylvania
and New York.
Now look up a rig locator map. You will find that rigs are active throughout
the region, right up to the New York
state line. This is not because the Marcellus stops at the line. It is because
New Yorkers have pulled their collective dress over their heads, and screeched,
“The sky is falling!” It has nothing to do with reality.
Sometimes, events outside our industry drive costs and prices. For example, the
disaster in Japan
caused a price jump that probably will be permanent. Why? Because just when
people finally realized that no one died at Three Mile
Island, another unforeseen event happened. Final results yet to be
seen.
One thing is sure: People in general don’t like what they don’t understand, and
the amount they don’t understand about the nuclear industry would fill the
Library of Congress. But they vote, based on so-called facts they get from
people like Michael Moore and Al Gore; ah, the wonders of democracy. These are
the same people who will look down their nose at you while plugging their
electric cars into coal-fired power plants. Check the safety record of the coal
industry vs. the nuclear industry. What about wind power, you say? According to
OSHA, 135 people have died in the last 30 years in the clean, green wind
industry; none have died in the nuclear industry. Don’t bother to throw Chernobyl into the mix
either. Cardboard Russian reactors with no containment buildings are not what
we are talking about. If we had won the Cold War sooner, they wouldn’t have been allowed to build it in the first
place.
Other driving forces are international events. For some reason, a lot of oil is
located in often-hostile places where the cultural rules are significantly
unlike ours. Problem is, we give them money. If we drilled here at home, the
price probably wouldn’t go down, but the money would stay here at home,
supporting drillers and their families, and going into our economy instead of
supporting people overseas. This would reduce the balance of trade deficit, and
help our bottom line.
A further determining factor is government interference with the free market.
When prices and profits go up, so does the windfall-profits tax; when the cycle
reverses, there’s no sympathy and certainly no “windfall losses” subsidy. Sure,
the industry gets some tax deductions and some subsidies, but according to
Lawrence McQuillan, director of the Pacific Research Institute, renewable
industries such as wind and solar industries get 22 times as much, and the
money-losing, environmentally unfriendly ethanol boondoggle gets 190 times as
much.
Petroleum contributes approximately 80 percent of our energy, and that won’t
change for a while. Sure, we can use up all our ground water, turn our food
into fuel, and
build a couple more wind farms, but that ain’t gonna do it. We need our oil and
gas. And we need drillers to produce it.
How does all this affect the house well driller, you might ask. These rigs need
water, so there is gonna be a water well at most locations. They also need
rat-holes and mouse-holes drilled – work for smaller rigs. Beyond that, many
operators use smaller rigs to set surface casing. These all are opportunities
for guys with smaller rigs. Even if you don’t directly participate, those
roughnecks are making enough money to start building houses. You still do drill
house wells, don’t you? At least they can’t export our jobs to China. ND
The World According to Wayne: The Future of Drilling - the Good, The Bad and the Ugly
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