By Younas Chaudhary
Over the last four decades, I have seen oil prices go from below zero to historic highs. Small producers like us are called heroes when oil prices are high but, as prices fall, we are the losers hedging our efforts on a highly volatile commodity.
Geopolitical factors determine oil prices and they are beyond our control. In the late 1970’s, we had the Iranian hostage crisis and in April 2020, the economic impact of the Corona virus brought oil prices down below zero. Now, we have economic sanctions against Russia. Oil prices are impacted on an hourly, daily, weekly, and monthly basis.
I admit that this is a good time for small oil producers with stripper wells across the country. There is great demand, oil prices are high, and these producers can get higher margins. However, the ones who are going to survive in this industry are those who are consistently focused and monitor the cost of operations.
How much does it cost to extract a barrel of oil from the ground? Small producers who have weathered high volatility in oil prices have survived. They have maintained a tight grip over their finances and the smart ones are not rejoicing. Instead, they are preparing for the next oil price slump.
I do not want to be the doomsayer here, but my experience tells me that we need to take a steady and calm approach to volatile oil prices. I do not celebrate when oil prices hit $50 or $140 per barrel, and I do not get upset or out of shape when it falls below 0 as it did in 2020.
The energy business is filled with ambiguity and impermanence. It is a seasonal gamble and the best way to play the game is to consistently control costs, take less debt, work hard, and have some foresight.
When oil prices fall, my company focuses on recompleting low-cost wells or doing preventative maintenance at low-cost wells so that we are ready for the next season. We try to purchase wells from companies that faced financial hardships because they failed to have fiscal discipline.
Today, small oil producers are making a profit, except the ones that spend too much money on corporate affairs or unwanted business. In simple terms, we are extracting a commodity from the earth and selling energy to consumers both individual and corporate. I do not see the reason for high investments in marketing or other areas.
For those who are rejoicing and spending too much money in unnecessary expenses, all I can say is that it will not make any sense. As prices have gone high, so have the costs of vendors, labor, and equipment. For example, currently it is hard to find casing, tubing and other materials because of a shortage. So, those who were selling tubings at a certain price are now charging two to three times more money for the same products. Also, there is a huge labor shortage and vendors have jacked up prices with high surcharges. This happens every time prices rise, but this year this has been particularly high because of supply chain issues and difficulty finding labor as we are slowly emerging out of the pandemic.
The payouts are quicker if you own wells without borrowed money; however, if you are borrowing money thinking that you can make a windfall in a few months and then exit, let me tell you that short-term thinking will not work. It takes a lot of patience, hard work, foresight, and shrewdness to understand the oil market.
The true cost of operations matters every single day when producing a barrel from the ground. Watch that cost always. And, instead of rejoicing or getting upset, always stay calm with a steady grin. Blessings!
The views, thoughts, and opinions expressed in this article are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. Further, I make no warranty regarding the accuracy or effectiveness of my recommendations, and readers are advised to consult other advisors as well as their own judgments in making business decisions.