The drop in oil and natural gas prices doesn’t just affect the price of gas at the pump or your monthly utility bill.  It also hits energy companies awfully hard, and not in ways you might expect.  In this case, over a billion barrels of oil are going to just disappear off of Chesapeake’s books.  That’s billion with a B.  That’s disappear as in no longer exist.

How does that happen?

Oil and gas companies are allowed to give a value to their wells even before drilling them and producing gas from them.  They do that to get loans from banks. There’s a formula provided by the SEC (not the football conference) that they use to determine that value.  The formula includes the price of oil or the price of gas, depending on which the company is expecting to produce.  When the price goes down, the value of the undrilled wells goes down.  It has more to do with what’s economically producible than anything, so a lot of properties that were marginally economic are no longer considered economic, and so have no value.  Poof, $1.1 billion dollars in value just disappears.

Oil and gas is just crazy.