Global market correction: Use the time wisely
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 significant drop in oil and gas prices is part of a global market correction brought upon by increased supply and decreased demand of oil and gas. Reportedly global demand is down significantly in the Far East and elsewhere, while supply has been steadily on the rise.
There are three significant factors that have contributed to the global oil glut: 1.) the unexpected increase in oil production by Libya; 2.) the refusal of Saudi Arabia to limit oil production in the wake of the oil surplus (much to the chagrin to its OPEC allies); and 3.) the U.S. is exporting a 鈥渘et鈥� two million barrels of oil per day. While the U.S. continues to import foreign oil, we are now exporting two million barrels of oil per day more than we are importing. This difference is referred to as 鈥渘et.鈥�
As we discussed in last month蘑菇视频 column, lower energy prices are good (temporarily) for the consumer; but it will cause havoc to those in the U.S. petroleum industry. All companies require profits to run their operations, and all companies need to get a certain minimum profit in order to sustain their operations. If oil prices fall too low, companies will find it necessary to not only lay off employees, but they may also default on loans. Unfortunately, this type of thing happens in all industries. It蘑菇视频 called a 鈥渟hake-out,鈥� and in our opinion, that蘑菇视频 exactly what蘑菇视频 happening in the industry right now.
But mineral rights owners shouldn鈥檛 stress out over the shake-out. While profitability on existing leases may decline for a while, oil and gas are here to stay. Like all shake-outs, this one will most likely be temporary. Part of the shake-out will cause legislators to reexamine oil and gas policies.
For example, the House Energy and Commerce Subcommittee on Energy and Power met on December 11 to consider repealing the Energy Policy and Conservation Act. The EPCA was created as a result of the oil shortages of the 1970蘑菇视频 and mandated policies that prohibited the exportation of sweet crude, which was thought necessary so that US oil companies wouldn鈥檛 chase more lucrative contracts outside the country, which would have further exacerbated the gasoline shortages of the 1970蘑菇视频. While those policies may have been wise in the 1970蘑菇视频 clearly markets have changed and the trade prohibitions have hindered America蘑菇视频 ability to participate in global markets, especially now that we are a leading producer of sweet crude. In fact, we no longer import sweet crude from Nigeria, which was for years our major supplier.
The panelists that testified before the Subcommittee were Lou Pugliaresi, president of the Energy Policy Research Foundation, Adam Sieminski, Administrator of the Energy Information Administration (EIA), Deborah Gordon, director of Carnegie Endowment for International Peace and Charles Ebinger, Senior Fellow of the Brookings Institute. For those interested in understanding what蘑菇视频 happening in the oil and gas industry, we highly recommend that you watch the subcommittee hearing, which is available on-line in the C-Span archives. It is a powerful, no-nonsense expose on the history of the oil and gas industries, with recommendations on how Congress should proceed in the very near future on how to handle the growth of these industries, and how America can and should play a leading role by providing a stable and safe platform for energy exploration and growth.
The hearing is two-and-a-half hours long, but well worth the time. Essentially the committee and the panelists recognized that whatever Congress decided to do, it must answer the following questions as it relates to energy policies, namely, how would the policy or regulation affect the economy, what would the impact of the policy mean for the environment and how would the policy affect national security.
One panelist made the specific point that pricing declines will create new markets. He was certain that as energy prices continue to drop, many Chinese companies will consider revving up production, which in turn will increase demand.
We see that kind of thinking in the U.S. Since gas prices have dropped, gas guzzling SUV sales have gone through the roof. Declines in energy prices will fuel more demand.
So what does this all mean to the mineral rights owner? Just because prices are going down, doesn鈥檛 mean that mineral rights have lesser value. If anything, what we are seeing now is an old-fashioned market correction 鈥� but on a global scale. Every industry goes through shake-outs. The far reaching ramifications will have impact on energy values throughout the industry. In referencing bull and bear markets, every market trader or broker knows the old adage 鈥渂ears make money, bulls make money, but pigs get slaughtered.鈥�
Accordingly, now may be the perfect time to acquire new mineral rights. And, believe it or not, now may also be the perfect time to sell or lease mineral rights that have been held hostage by antiquated 鈥渉eld by production鈥� contracts. We are getting calls from mineral rights owners that recognize the benefits of bear markets. No one has a crystal ball to see how long oil and gas prices will remain low. However, rest assured that your mineral rights have value, and now may be an ideal time to take advantage of the bear market. Use this time wisely.
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.