Oil patch veteran Jim Gray offers wisdom on crude collapse

Jim Gray got his first job in the oil patch in 1956, when oil was trading somewhere south of $5 a barrel. He's lived through a few of these boom/bust cycles and has some wisdom to share.

Doesn't know if we've hit bottom yet, but says the industry will be fine long term

The drop in oil prices was partly rational and partly irrational (Andrey Rudakov/Bloomberg)

Jim Gray got his first job in the oil patch in 1956, when oil was trading somewhere south of $5 a barrel.

Trained as a geologist, Gray founded Canadian Hunter Exploration in 1973 and built it into one of Canada's largest natural gas companies.

He's lived through a few of these boom and bust cycles, enough of them to have some perspective on the current collapse.

With nearly 60 years of experience, here are five things Jim Gray sees unfolding in the energy sector right now.

Rational versus irrational drops in oil prices

The price of oil dropped 50% in less than 6 months. Not all of that drop was rational.

Gray says that when oil drops precipitously, as it has done, half the drop is rational and half the drop is irrational. 

"We started last June at $105, down to $65 or $60 was rational, there was new oil coming on from Libya and Nigeria, from then on there’s been a knee jerk or irrational fall."

Gray doesn't know if oil has hit bottom, but says once it has happened, oil will bounce around at the bottom for six or eight 8 months, but the irrational part of the drop will recover very quickly, meaning it will climb to the $60 or $65 range.

This drop wasn't all about Saudi Arabia

Nigeria and Libya brought approximately 1 millions of oil supply online in the spring of 2014. Jim Gray says that was the trigger for the collapse in prices.

"We consume about 92 million barrels of oil every day," says Gray. "Once the supply and demand gets a little out of whack, it just takes one, or two, or three million barrels more supply and you've got a crisis."

Gray says that between Libya and Nigeria, they brought on about a million barrel last spring, and that was the trigger. 

However, Saudi Arabia and Russia are both hurting

Russia is losing $500 million a day. (Sergei Karpukhin/Reuters)

Gray says that, in his opinion, oil cannot stay down for an extended period of time.

"Russia is in the tank, they’re losing $500 million a day, they have 17% interest rates," says Gray. "Their bonds are junk bonds."

"Saudi Arabia is going through money, $500 million dollars a day, that’s $170 billion a year. Mexico and Venezuela are suffering. With all those countries suffering, it's a proxy for political instability."

There will be opportunities on the bounce

Companies need to keep cash free for the bounce back in oil. (CBC)

The best way for an energy company to get through this is to have a strong balance sheet now and cash later.

"There’s going to be money made on the bounce," says Gray. "So keep your balance sheet free, have some opportunistic money and keep your core skills in place."

A little pain is probably good for Alberta

A little financial pain is probably going to be good for free spending Albertans. (Brett Purdy/CBC)

Both the provincial government and many individual Albertans are feeling a little over extended right now. Gray says that's a hard, but important lesson to learn.

"For those people who bought big houses or leveraged their personal wealth, I bet that lots of those young people will look back in 20 years and say the life experience they got from this was the best they’ve ever had."

"We’ve had chequebook public policy in this province and with a lot of our people for too long and this cold shower that we’re having is not all bad."

The Calgary Eyeopener

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