Is the oil thesis, the great American renaissance boom in oil, in trouble? You know I am a huge believer in every aspect from the oil in the ground to the drilling to the pipelines.
But this sudden decline in oil prices is going to give some of the big oil exploration companies the jitters, and not just because we have too much supply here, but because of what Saudi Arabia's doing. Yesterday, the Saudis lowered the official selling prices for its crude, which marks the fourth straight month that they've cut the price, not the production.
What does this mean? One could argue that the Saudis want to maintain their market share. I get that, and it makes sense. I think it's something else though. I think the Saudis want to make our oil too expensive to keep drilling for. They recognize that there is a price where we will cut back our drilling. They are not afraid to drive oil down to that price to make the U.S. more dependent on the Saudis -- we still use a lot of their oil -- and less independent. In short, they are trying to price us out of the game.
There's plenty of cushion in all the big shale plays -- Bakken, Niobrara, Eagle Ford and Permian -- at these levels. This isn't a price where there's panic. The trajectory, however, is menacing, as is the velocity of the decline. It's a real bear market in oil.
If the Saudis are just going to follow the price down, they will make it less economic to drill here, and some of the independents will have to think twice about adjusting their long-term budgets if they were based on ever-rising oil prices, as we know some of them are.
Plus, let's not forget that the costs of drilling have gone higher as the scarcity of labor in the areas where the oil happens to be affects the price Halliburton (HAL) or a Baker Hughes (BHI) has to charge. The oil companies have been adept at finding ways to save money -- witness the switch from ceramics to sand for cheaper fracking -- but there's always the risk that there might be less oil and gas in an area that had thought to be abundant. With costs escalating and worries about the Saudis crushing the pricing umbrella, a couple of the oil bulls are going to break ranks for sure.
Not only that, but keep in mind that the costs of transporting oil from where it is to where it needs to go are rising dramatically. Al Monaco, the CEO of Enbridge (ENB), the biggest pipeline company in North America, talked last night on 'Mad Money' about how environmental rules and safeguards have elevated the price of new pipe pretty much everywhere in this country. Monaco has to get his return, which in turn lowers profit margins for the oils. Plus, you have to use trains where there is no pipe, which is more expensive.
I do not think the long-term story is in trouble. But I know many people, including people at the oil companies, are nervous about this decline, hence the radical fall in the oil-services and, more important, oil-rig companies, particularly the offshore businesses.
Oh, and given that there are places in this country where oil companies are only able to get about $70 per barrel because of the glut and the lack of storage, we will certainly start to see cuts. Fortunately, most of the oil is much cheaper but all in, to say you don't need to worry is to have your head in the fracking sand.