The energy industry in the U.S. has a love/hate relationship with the government. On the one hand, it hates virtually every tax, regulation or barrier between business and production, on the other hand, when production tightens due to government intervention, prices can in fact grow. We are seeing that phenomenon on a very practical level where I live in Houston, Texas. When government does intervene, there is an affect on supply that can lead to higher prices. The energy industry might hate the action, but it benefits from the results of higher prices.
Everyday I read of another story of thousands of jobs being cut in the energy industry. This is a direct result of an influx of cheap oil being dumped into the United States by OPEC and Saudi Arabia, as well as the delivery of over a year of oil coming to the United States through the Keystone pipeline. Yes, the Keystone pipeline. It has been over a year since TransCanada released the following statement:
TransCanada Corporation... announced today that at approximately 10:45 a.m. CST on January, 22, 2014, the Gulf Coast Project began delivering crude oil on behalf of our customers to Texas refineries. The completion of this US$2.3 billion crude oil pipeline provides a safe and direct connection between the important oil hub in Cushing, Oklahoma and delivery points on the U.S. Gulf Coast.
In other words, we already had the pipeline, all President Obama did was veto its extension.
In fact, in that year's time, a great deal of oil has already come across the border from Canada. According to BBC.com,
Canada already sends 550,000 barrels of oil per day to the U.S. via the existing Keystone Pipeline. The oil fields in Alberta are landlocked and as they are further developed, require means of access to international markets. Many of North America's oil refineries are based in the Gulf Coast, and industry groups on both sides of the border want to benefit.
Benefit? Definitely, but the U.S. may very well have reached the point of enjoying too much of a good thing. 550,000 barrels a day translates into over 200 million barrels over the last year. This type of activity doesn't happen in a vacuum and it was bound to have an impact on both supply (a potential glut) and demand (a reduction in prices). That would lead to a dramatic cut in oil prices and now consumers are enjoying gas prices of around $2 a gallon in much of the U.S. "Enjoying" may not be the right word if you are in the oil industry in Texas.
Forbes Magazine reported
The news that Apache Corp. will lay off about 250 people, or 5% of its workforce. Later in the day a bigger shoe dropped: oil services giant Schlumberger said it was in the process of slashing 9,000 workers worldwide. These are only the latest blows to land on an oil industry already staggering under $50 oil. So far there's been at least 31,000 cuts announced in North America alone by the likes of Shell, Pemex, Halliburton and Suncor (full list compiled at the end of this piece) and they will only get worse. It's not just Houston. In North America, Midland, San Antonio, Sweetwater, Oklahoma City, Williston, Pittsburgh, Alberta, Mexico City, and even Bakersfield, Calif. will feel the pain. But Houston is the energy capital of the world, and will unfortunately take the brunt of the cuts.
These cuts are happening because the glut in energy is leading in a drop in profits per barrel, gallon, and every other form of energy measurement. With the announcement that Obama vetoed the Keystone Pipeline XL, there was a great deal of moaning in the energy industry. However, when you look at the simple economics, it is obvious there was also a collective sigh of relief.
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