Why the Price of Oil is Doomed for Longer than Expected
by Wolf Richter
WolfStreet.com
November 23, 2015
US natural gas has taught us this: In this era of free money, prices can stay below the cost of production a lot longer than anyone imagined years ago.
When cheaply borrowed money leads to overproduction, which leads to excess inventories despite rising demand, prices plunge to ludicrously low levels. And if borrowed money keeps pouring into the sector to keep existing investors afloat, drillers continue to overproduce because they have to in order to get even more new money to service the pile of existing debt, thus piling up even more debt and causing the price to get hammered down over and over again.
The price of US natural gas collapsed in 2009 and, except for a few brief episodes, has remained below the cost of production ever since. Now that investors are finally turning off the spigot, persistently negative cash flows can no longer be funded with new debt. Two major drillers have gone bankrupt this year. And the second largest natural gas driller in the US, Chesapeake, is headed for deep trouble.
But this is six years after the price collapsed. Tens of billions of dollars from investors have been drilled into the ground to never be seen again. And the price of natural gas is still below the cost of production, as production hit new records.
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