Market Beat: Don't Drill, Baby
People don't want to invest in oil, plus--Tesla misses, and FTX marks are going back to the well.
It’s a new week! We’re back after a few days’ hiatus. Thanks for reading as always!
No Oil For You
Oil, for those who didn’t know, is a bit of a boom-slash-bust industry. It costs money to extract oil from the ground, and so when oil is pricey, new entrants generally emerge to open new wells or resuscitate old ones. Over the last 100-plus years, this cycle has repeated in a beautiful circle of wildcatters flooding out for a gold rush on Texas Tea, making fistfuls of money, and then eventually losing their shirts when prices collapse and those same operators can no longer turn a profit.
The rise of shale drilling contributed to this boom cycle for America, particularly. The low-cost nature of shale drilling meant that American producers were able to pull oil more cheaply from the ground than harder to reach sources, like deepwater drilling (and even more cheaply than places that are thought of as quite inexpensive, like Saudi Arabia1).
So, if you haven’t noticed lately, oil is up.
From a low near $70 a barrel in June and July, the Brent crude price per barrel has jumped roughly 20% in the last three months, producing headaches for consumers and politicians alike.
This, traditional economics would say, should create a gush of supply in the form of new wells being drilled and a general increase in the output of oil.
That, however, is not happening.
You see, almost 10 years ago, the price of oil collapsed, from trading at over $100 per barrel at the start of 2014 to a low of $27 at the beginning of 2016. This prolonged torture by the market did something… interesting to oil market participants. It made them learn.
While that might sound funny, it is incredibly true and raises a number of interesting questions, like why isn’t new money flowing into oil production, and why aren’t upstarts with no memory of the last crash diving in head first?
Well, I think there are a few things at play here.
LPs at oil funds aren’t eager to invest new cash (their memories are generally long). Rather than start new wells, they would rather demand cash be returned to them in the form of dividends, etc.
Oil companies are generally operating in a much more disciplined fashion than in years past.
The previous bust cycle was so dramatic and traumatic for the industry and resulted in so much consolidation that the ranks of would-be wildcatters just isn’t what it used to be.
The Permian Basin is peaking earlier than previously thought.
Also, oil executives really don’t like the Biden administration (Though the full extent of this dislike, or what actual economic impacts may come from it, are tough to quantify. It certainly doesn’t help, in any case.).
Anyway, while this matters a lot for those of us driving ICE vehicles at the pump, it also matters for a whole lot of other important things, too. In other words, its worth keeping an eye on.
Tesla Disappoints
Apologies to all the Musk fanboys and girls out there, but it now seem safe to say that the meteoric growth experienced by Tesla over the last few years is stalling, if not falling. The company reported its third quarter production and delivery numbers today, and they were, well, disappointing.
At the start of the year, Musk had claimed that the stretch goal for the automaker would be 2 million units, while a goal of 1.8 million would be the primary target. In other words, it appears that barring a Q4 miracle, 2 million is out of the question. It’s also pretty clear that the company can’t endure any more demand destruction to hit its 1.8 million target as well.
All of this is not likely to matter to the most hardline Tesla bulls, who will point out that the stock has been on a tear in 2023 (it’s up 104% year to date). However, since July the stock is down 3%, and with no shortage of questions and issues plaguing the company, one has to wonder if the air is finally coming out of the balloon.
Of course, I’m not sure whether anything will come of all this. After all, when it comes to Tesla, you shouldn’t throw stones when you live in a glass house.
Fool me twice.
Someone in a movie once said that stupid is as stupid does, and while I’ve never been able to close the circular logic gap behind that statement, the fact that people who lost millions or their life savings, are still backing this whole enterprise seems to be a pretty compelling manifestation of the quote.
An article from CNBC (linked above) contains the following astounding passage:
Jake Thacker, an FTX customer in Portland, Oregon, told CNBC he lost hundreds of thousands of dollars on the exchange shortly after he lost his job in the tech industry.
“I’m in quite a big hole right now,” Thacker said. “I’m probably going to have to file for bankruptcy.”
Thacker told CNBC he “would encourage people to still invest in crypto.”
Its astounding to me that, in the wake of not just FTX, but Celsius, Three Arrows, Voyager, and the whole Do Kwon drama, that people still think that crypto—in its current form, no less—is still the future.
I don’t know what else to say. Without a robust system of custodianship (which keeps most institutions from getting involved), the cycle will likely be doomed to repeat itself.
Final Thoughts…
Feel good: second malarial shot for children gets approval. Mexico’s gangs may be the country’s fifth-largest employer. The recession is still on the horizon. Today’s blinding glare of the obvious: office properties are still in trouble. American spending is still strong. Airbnb’s CEO says the company is broken, but he can fix it. Financial advisors are fighting irrelevance.
A big part of the reason for the higher cost per barrel breakeven for Saudi Arabia, however, are the lavish expenses of the Kingdom that the country must keep up.