From a 150-year-old family residence in his native Natchez, Miss., and a second home in New Hampshire, Stephen A. Smith monitors the oil and gas world, bringing the perspectives of having been a refinery planning analyst, E&P analyst and economic modeler since the 1980s, in Houston, New York and elsewhere.

Today he runs Stephen Smith Energy Associates, a firm he started in 2001, after stints analyzing integrated firms and E&Ps at RBC Dain Rauscher in Houston from 1996 to 2001, and at Bear Stearns in New York from 1987 to 1996.

Growing up in Natchez, he knew the best employment opportunities were at the Exxon refinery some 80 miles away in Baton Rouge, Louisiana. He studied chemical engineering at Notre Dame and earned an MS in operations research from Cornell. His first job was as a refinery planning analyst for Mobil Oil’s international division, helping its foreign affiliates use modeling software, primarily in Europe.

This led to work as an economic consultant. In the early 1970s he joined consulting firm Bonner & Moore in Houston (eventually acquired by Fluor). In 1978 he joined Data Resources Inc. DRI was a leading consulting firm that pioneered economic modeling of the U.S. economy—five years later he was senior vice president, running the energy services group with about 25 employees under him. He routinely briefed senior industry executives, Congress and once, President Reagan’s Council of Economic Advisors. (DRI was acquired by McGraw-Hill.)

In 1987 he became an equities analyst, joining Bear Stearns in New York, and then moved back to Houston with Dain Rauscher.

Steve Smith

Investor: Steve, what is the scope of your research today?

Smith: I publish a weekly newsletter on natural gas markets and a monthly report on oil and gas and macro topics. These reports go out to a few clients such as large investment or hedge funds, as well as some oil and gas companies.

Investor: What do you make of oil prices tanking?

Smith: Part of the reason so many people were surprised by the price collapse is that we have seen similar imbalances over the last few years, and yet, the oil prices did not collapse.

Investor: So why is it different this time?

Smith: There are times when you put the “last straw” on the camel’s back and nothing happens, but the enormous scale of the U.S. shale boom proved to be the real final straw.

The Saudis have had several years to watch the U.S. oil shale show and it has exceeded all expectations. Over the three years ending in 2014, our oil and gas liquids production increased by a total of 3.6 million barrels per day—slightly more than world oil consumption growth for the same period. This is a nontrivial event. By itself, the U.S. has supplied all the incremental demand on the margin for the world, and this clearly captured the Saudis’ attention. With $100 oil prices going forward, this U.S. supply vs. world oil demand gap would have continued to expand.

Investor: Do you see OPEC as having lost control of world markets?

Smith: OPEC’s course is set by Saudi behavior. For at least the immediate future, and possibly longer, the Saudis have decided it is in their best interest to abandon their role as OPEC’s central swing producer. This unmistakably assigns the oil pricing task to the free market, and the recent oil price collapse is the direct result. Saudi oil minister Al-Naimi has been a real bulldog about this—he’s taken a very aggressive stance and has been actively “talking down” the price at every opportunity—welcome to the free market.

While the U.S. shale boom is the central and immediate driver of this new Saudi policy, there are some perennial problems within OPEC which set the stage. In the recent run of $90 to $100 prices, as is normally the case, all of OPEC enjoyed the party hors d’oeuvres, but as usual, the Saudis had little company when it was time to clean up. They have grudgingly accepted this role for years but one important factor has just changed: The U.S. shale boom, left unchecked by previous OPEC/Saudi support of $100 oil, was about to substantially increase the effort required for the post-party clean-up. This time, the Saudis have simply said: “No thanks.” The $100 oil policy would simply have cost them too much. They have seen this game before in 1986.

Investor: What is your price outlook?

Smith: U.S. producers are beginning to cut back on drilling, but they are still going to grow production in 2015 because of the time lags involved in this process. Their hedging programs build in another lag as well, so I think oil and gas prices are facing an ugly year for most of 2015. By 2016, there should be a more visible production slowdown from both the U.S. and other non-OPEC producers and maybe a bit of oil-price-stimulated demand bonus as well. Our best guess at this point might be an average WTI price in the $60s for 2016.

Among the various oil shale producers, the lower-debt and larger-scale Permian and Eagle Ford companies would appear to be best-positioned to withstand this extended period of lower prices that lie ahead.

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