Ever heard the saying “a lie gets half way around the world before the truth puts it pants on”? Well, when it’s a financial lie and it’s being repeated often enough by lazy journalists, a lie can do a few laps of the world before the truth puts it pants on.
The lie in this instance relates to the oil production glut that may or may not be happening in the US. The oil price has suffered a significant fall from its peaks of 2014 after a combination of surging production in the US and OPEC’s refusal to accommodate that extra supply by cutting its own production.
As we previously showed, the oil price decline had prompted a variety of “experts” to predict where oil would go next. Hilariously, the range varied from $10 to $200 and the media gave equal attention to every prediction. No longer is the financial media about reporting facts and information, its job is entertainment.
Keeping that in mind, investment bank Goldman Sachs came out with a research report in early February stating that despite US oil rigs being idled at an unprecedented rate in response to the falling oil price, US oil production would continue to rise.
The media pounced on this idea and continued to repeat it as an unquestionable fact. Production continuing to increase would keep oil prices low and inevitably lead to more layoffs, companies falling over and significant bad debt in the financial system. This is entertainment for the financial media – remember, most blockbuster movies these days are disaster movies!
Much of the growth in US oil production since last decade has come from shale oil basins through wells that need to be hydraulically fractured or “fracked” after drilling to allow the wells to produce oil or gas. These wells don’t produce large daily amounts of oil and they have significant decline rates – historically there have been average annual well decline rates from 23% to 49% across major shale oil basins in the US.
Now this matters because if these wells are declining at a rate of 23%-49% a year, that loss of production needs to be replaced by drilling more wells to continue to produce the same amount of oil. Yet Goldman Sachs were suggesting US production would continue upward despite drilling falling significantly – and the media reported it as fact.
But what did oil production actually do? If you watched the weekly production reports from the US Energy Information Administration (EIA), each week from January until the end of March production continued to rise – each week was another production high.
However, towards the end of March the US states began to report their production data for January and numbers were down. Soon after the states’ data came in, the EIA’s monthly numbers for January 2015 showed a decline in US oil production of 135,000 barrels a day compared to December 2014.
How could this be?
The EIA weekly production data is calculated by a computer algorithm ahead of time, as the actual production data is on a lag. So there was a blind spot for around six weeks in February and March where the weekly oil production figures continued to increase before the actual figures were released showing production declining way back in January.
During this time the media continued with Goldman Sachs’ story that production would increase despite oil rigs being idled at a record rate! And from the time of Goldman’s report until the time January production data was released, the price of oil declined another 15%! We’ll leave it to your imagination why Goldman Sachs would write such a report.
You’re probably thinking, I don’t care about oil, but this story isn’t really about oil. It’s about what passes for news and how it can influence our investment thinking. Every day the financial media reports on another investment prediction or regurgitates a research report from a bank or financial institution.
Few of these predictions or research reports are questioned or vetted, the media has space to fill and the reports and predictions flow out into the world and people read and often believe them. And the more hyperbolic they are the more attention they’re likely to get.
We’ve heard them all. Every week there’s someone new predicting the next market crash, or on the extreme side, telling us we’ll need to start panning for gold so we can trade it for food because the financial system is going to collapse next year.
Every time you read, hear or watch the latest financial news, it’s always worth asking yourself “is this the truth, or is the truth still putting its pants on?”
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.