By Russell Gold
T. Boone Pickens has seen plummeting oil prices before and says he knows what the problem is.
Energy companies are pumping too much oil and none of them wants to be the first to stop, Mr. Pickens said Wednesday in an interview with The Wall Street Journal.
The result—plunging crude prices that aren’t going to rebound until oil companies do what “a five-year old could’ve figured out” he said. Stop drilling.
The legendary oilman said energy companies are optimists. “They keep thinking the price is going to go back up,” the 86-year-old said. “I am not criticizing the industry. I’m not. It is a bunch of guys that think independently of each other. We all—and put that in there—we all keep drilling” and hoping other companies stop first.
The same thing happened a couple years ago in North America’s natural gas market. Supply outstripped demand and prices began to fall, but no company wanted to blink first. The same phenomenon is now happening with crude. It’s an oil-soaked game of Prisoner’s Dilemma.
The price of oil could sink lower—perhaps to $70, Mr. Pickens said. “It depends on if everyone continues to produce, then we’ll have too much oil.”
Mr. Pickens, an oilman since 1951, is chairman of hedge fund BP Capital Management and former CEO of Mesa Petroleum. He’s been right before. In May 2008 as oil prices were skyrocketing to previously unseen heights, Mr. Pickens predicted oil would hit an astronomical $150 a barrel. Some industry watchers scoffed at the idea, but two months later oil prices peaked remarkably close to that level.
One development that could buoy oil prices is a production cut by the Organization of the Petroleum Exporting Countries (OPEC) —a move lead cartel member Saudi Arabia has signaled it’s unwilling to do.
A more likely scenario, Mr. Pickens said, is that Saudi Arabia is in a stand-off with U.S. drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.”
Oil prices are $27 a barrel lower today than they were in June when crude traded at $107.26 a barrel. A price drop of another $5 a barrel will seriously dent company spending on new wells in 2015.
Mr. Pickens is still a fan of producing more American energy, preferably homegrown natural gas. But he’s fine with nuclear and renewables, too, though he cautions that alternative energy sources have their limits.
“There are only two fuels that can move an 18-wheeler and those are natural gas and diesel,” he said.
The good news, long term, is that there’s plenty of oil and gas in the U.S., Mr. Pickens said. “Hats off to the oil and gas industry in America,” he said. “Are they in there working for America? Hell no, they are in there working to make money, but it just so happens that is for America too.”