GARY SHILLING: I still think we could see $10 oil

Screenshot via Bloomberg TV

Legendary economist Gary Shilling stands by his longtime forecast that crude oil will drop to $10. Facing a near-perfect storm, OPEC is dead as a cartel. Now the market is in charge of oil—and the market has different ideas.

Speaking at the Mauldin Economics Strategic Investment Conference in Dallas on Friday, Shilling said OPEC died—or at least learned its fate—back in November 2014 when Saudi Arabia decided to defend market share regardless of price. They’ve stuck to that position and aren’t going to change.

Unenforceable Quotas

Shilling says that for any cartel to succeed at price-fixing, it has to have just the right conditions. OPEC had them for decades with strong global oil demand, lack of competition, and few alternatives to its products.

All those conditions are gone now.

Economic weakness has cut into energy demand growth. New technology enabled competitors, in North America and elsewhere, to compete with OPEC on price. Worst of all, energy consumers are rapidly switching to greener alternatives like solar and wind.

Forget Breakeven Points

Shilling talked about the widely discussed breakeven prices the OPEC countries need to balance their government budgets. He said the numbers don’t matter. Exploration and drilling costs don’t matter, either.

So what matters? Shilling says it’s the marginal production costs. With so many oil deposits now identified and surveyed, exploration expenses are a sunk cost for most oil producers. Ditto for drilling.

They spent the money and it’s gone.

What counts is the still-unspent cost of pulling oil out of existing wells. In some Texas fields, this is as low as $10 per barrel. Production will continue as long as owners can sell their oil for the marginal cost or more.

That leaves a lot of room for oil to fall, despite the recent rally to near $50. Shilling didn’t predict a date when oil would have a ten-handle, but he’s sure it’s coming.

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