Legendary Jeremy Grantham Warns Nothing Like This Has Ever Been Experienced Before

Friday, February 6, 2015
By Paul Martin

February 06, 2015

Oil’s Well At The Oil Well – In the latest GMO market letter, Jeremy Grantham walks us through some fascinating aspects of the fracking influence in today’s oil market and the economy. Here’s a bit (editor’s note: the $32 per barrel price he notes is where North Dakota Williston Crude traded in late January):

The unique features of U.S. fracking

So what happens now? We originally heard a brave story of how increased fracking production would cheerfully continue full steam ahead, even at prices below $40 a barrel. This is of course nonsense: it was not clear that the U.S. frackers were making very good money collectively at $100 a barrel. Now, at $32,1their cash flow drops by $68 a barrel (less taxes, etc.) and we are meant to believe that they are merely winded. Rigs are being rapidly withdrawn as I write. What is not realized yet, although very shortly will be, is how rapidly fracking wells deplete. Even some of the recent impressive improvements in “productivity” have been moving more of the total output into the first year. Up to 65% of all of the available oil is now often delivered in the first year!

Even in the heyday last July, 75% to 80% of all new production in the Bakken was needed to offset the decline from existing “legacy” wells. It could be worked out that daily production would start to decline with only a 25% reduction in oil rigs at work, a level we are rapidly approaching. Thus, at current or lower prices, Bakken production should turn down by June and possibly by the end of the first quarter.

Meanwhile, back at the head office, several of the “majors” are also savaging their capex budgets for regular oil development. Unlike fracking, which takes days to adjust, old-fashioned oil, which is increasingly deep offshore or in countries that we can all agree are more difficult to operate in than, say, North Dakota, can take 5 to 10 years (and occasionally 15) before a planning dollar becomes gas in the tank.

Spending cuts, therefore, will echo into the quite distant future as reduced oil production for which there will be no quick fix, for by then any increases from fracking will be distant memories. And this is a key point: U.S. fracking is the only important component of global supply that can turn up almost immediately by bringing in new rigs and drilling wells in under two weeks, adding 20-30% to production in a year as it did for each of the last two years. It is also the only important component that can turn off quickly by depleting almost completely in three years.

The Rest…HERE

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