Lower Oil Prices Are A Mixed Blessing American consumers benefit. Companies exploiting US shale oil may suffer

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WASHINGTON – When it comes to falling oil prices, we can definitely have “too much of a good thing“. Sure enough, this is great news for global consumers, and for the transportation sector. Lower oil means lower gasoline, diesel and jet fuel prices.

Mixed picture

In America, however, it is a mixed picture. America consumes about 18 million barrels of oil a day. Despite significantly higher domestic production, (US oil output is up by 56% since 2004), half of what we use is still imported. Lower oil prices translates into a lower bill for what we buy abroad. This is great news.

Shale oil not profitable when crude prices are too low

Still, if you are trying to exploit additional US oil reserves, a sharp decline in global oil prices is not what you want. Most of the untapped US oil is trapped in shale formations. Getting to it is comparatively much more expensive than extracting oil in Saudi Arabia.

Therefore, at least in general, it makes sense to extract oil from shale formations only if global crude prices stay above $ 80. Below $ 80, depending on the region, the geology and other local factors that may affect production costs, it may not make any economic sense to drill, because extracting that oil may be more expensive than what you get paid when you sell it.

End of shale oil?

So, here is the picture. If oil prices keep getting lower, and if the market expects that they will stay low –say, at $ 75 or less per barrel– for an extended period of time, according to many analysts this will be bad news for the domestic shale oil industry. Some drillers will simply stop money-losing operations.

Now, there are many other experts who believe in the endless ingenuity of the American energy industry. They count on more and more innovation coming on line that will further cut shale oil production costs, allowing producers to make money even if the price of oil stays low for a long time.

Shale exploration went on, despite the skeptics

After all, when hydraulic fracturing and horizontal drilling were first introduced, very few believed that they could work. And then it was widely believed that shale wells were not such a good deal because they would produce much less that conventional wells.

Well, most of these assumptions and beliefs have been proven wrong. The shale oil industry managed to become leaner and more efficient. In fact, some experts argue that most producers can stay in business and make money even if oil is at $ 65 or $ 60 a barrel, or even lower than that.

I have no idea. However, the record so far indicates that there is significant technological progress in all aspects of exploration, drilling, water used for fracking, and more.

Oil glut indicates a slow world economy

That said, this significant oil glut at the source of lower prices may be bad news for different reasons. If, as some believe, this sudden oil over supply is due to a structural, as opposed to temporary, fall in demand, this means that a slower world economy needs far less energy.

Bad news from Europe and the BRICS

Indeed, we know that, while America is doing alright, (not great, but alright), Europe’s economy is stagnating, while the BRICS countries are doing poorly. Russia is at zero growth, Brazil’s (short) miracle ended, and China is slowing down.

America needs to export

The American economy depends more and more on a healthy global economy. Whatever the implications of low oil prices for the US domestic energy industry discussed above, a stagnating world economy means less trade and fewer US exports.

If you consider that most large American corporations have higher sales abroad than at home, you get the picture. If Europe does not buy, this means lower profits for Caterpillar, United Technologies, 3M, GE and many others.

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