Will lower oil prices affect the value of mineral rights?
Joe Wilson is CEO of Infinity Resource Group, Inc., a professional mineral rights consulting firm in Parkersburg, W.Va., and a Registered Landman. David Pearl is managing director of a CNG patent holding company and president of a CNG fuel island development company. Your questions are welcomed by calling 412-535-9200 or by e-mailing joe@irg-energy.com.
The first question mineral right owners ask is what their mineral rights are worth. In previous columns we have discussed various factors affecting mineral values, such as production costs, geology, geography, infrastructure, whether it蘑菇视频 better to lease or sell mineral rights, etc. In this column we examine recent falling oil prices.
Over the last couple months, oil prices have been dropping considerably. Consumers are rejoicing because for the first time in years, gasoline, diesel fuel and home heating oil are coming down in price. We鈥檝e heard that gasoline is below $2 per gallon in a few midwestern towns and there is speculation that the average price of gasoline will drop to below $2.00 per gallon nationwide.
Why is this happening? The fall in oil prices is due directly to supply and demand. Since fracking and shale drilling began, the U.S. has for the first time in many years, an oversupply of oil. We are now producing 4,000,000 barrels per day, which is significant because world production is around 75,000,000 barrels per day.
And for the first time in years, the U.S. is exporting oil and liquefied natural gas to foreign countries which helps decrease our trade deficit and increases the value of the U.S. dollar. Plus the decrease in oil price will increase profit margins of businesses that use petroleum products in product processing. We鈥檝e heard that some freight companies are lowering or eliminating fuel surcharges. So with the gaining strength of the dollar and the lowering of transportation, energy, and production costs, it is possible that prices of products will come down. This is all positive news for the U.S.
On the flip side, there are some severe consequences that could emanate from this sudden reduction in oil prices. For example, the cost of building the newly created shale boom is expensive, and oil and gas companies have considerable debt, which is budgeted into profits earned from oil and gas profits. If the price of oil gets too low, these companies might not be able to pay their bills and go out of business, thus affecting thousands of new jobs and causing losses to investors and lenders. And when oil prices rise again investors and entrepreneurs will think twice before reentering a business that has proven itself to be vulnerable to outside influences.
So why is this happening now? The short answer is Saudi Arabia. The Saudis are in a perfect storm to make a long term strategic move that will bolster their worldwide dominance. Some economists suggest that the Saudis have declared an economic war against the U.S.
Forty years ago, when OPEC was formed, they quadrupled the price of oil overnight causing a worldwide recession. OPEC has controlled the price of oil ever since by controlling oil supply. The largest oil producer in OPEC is Saudi Arabia. The Saudis produce oil cheaper than anyone else. There was a lot of heated debate at OPEC蘑菇视频 meeting on Nov. 27 about how to respond to the current drop in oil prices. Many countries wanted Saudi Arabia to cut back its oil production in order to prop up the price of oil. Many of these nations need high oil prices in order to fund their national budgets. The Saudis however took the opposing view and are willing to let the price drop 鈥� almost freefall. Why? First, when they tried to do what their fellow OPEC members requested back in the 1980蘑菇视频 their actions did not stop the decline in prices and they lost market share anyway. Second, their government is prepared because they have built up massive foreign exchange reserves to finance deficits. Third, they know that the fall in price will stifle further U.S. oil production and perhaps cause existing shale drillers to go out of business because these drillers require a higher price for oil. Failure to get a higher price will cause many US drillers to go out of business, thus securing for the Saudis the long term ability to dominate oil. But there is another little mentioned component that requires the U.S. to stifle its criticism of Saudi Arabia: The free fall of oil pricing is hurting foreign terrorist organizations like ISIS that relies on high oil revenues to fund their operations. The Saudis are in a win/win situation.
It was recently reported in the New York Times that major oil companies such as BP and Conoco are cutting investment spending and will be cutting middle management and other jobs in 2015. These large companies are in position to ride out the storm. Smaller drillers may be adversely affected and go out of business. It will be interesting to see who buys the assets of these companies as they go bankrupt. Ultimately, when U.S. oil companies are slowed and prices begin to stabilize the Saudis will once again be in the position to dominate the global oil markets by manipulating supply.
Historically, natural gas prices are a fraction of oil prices, but there have been instances where gas prices remain unaffected by oil蘑菇视频 gyrations. Fortunately natural gas has a stable customer base, with a growing domestic market share with each passing quarter. Although Conoco is slowing production, it acknowledged a worldwide projected growth of three percent in 2015.
Major truck fleets and state and local governments are the in process of converting fleets from gasoline and diesel to natural gas. Will the drop in gasoline and diesel prices slow the process? Perhaps. But no one is suggesting that energy prices will remain low. In fact everyone seems to be in agreement that it is only a question of time before oil prices return to pre-fall levels, if not higher. It seems that Congressional leaders recognize that for America to be secure and immune from undue foreign influence we must have a viable natural gas industry. Proof of that sentiment is found with the fact that last week Congress began discussing the reinstitution of tax credits to encourage fleets to convert to alternative fuels such as compressed natural gas and liquefied natural gas.
What will happen now? How will mineral rights be affected by all of this? We鈥檒l have to wait and see.
Before making any decision regarding the disposition of your mineral rights, it is always advisable to seek professional advice from a mineral rights consultant for an evaluation of your mineral rights, and to consult with your lawyer and tax advisor.