Will Low Crude Prices Kill The US Oil Boom? So far the experts are optimistic. But much will depend on the pace of cost cutting innovation

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WASHINGTON – Is the American sensational oil boom going to be killed by low crude prices? Opinions differ. But so far the optimists still dominate the field.

Plenty of oil

Here are the issues. On the positive side, there is plenty of recoverable oil in America. Much more than industry specialists believed there was just a few years ago. But on the negative side most of the new discoveries are in what the energy people call “unconventional oil”. By this they mean oil trapped in shale formations. This oil can be successfully exploited. But, compared to other oil extracted elsewhere in the US, let alone Saudi Arabia, it is much more expensive to obtain it.

Shale industry needs high oil prices

Which is to say that most US energy companies developing shale oil would like to see a crude price at or above $ 90 per barrel. When oil is at $ 100 or above, everybody makes money. Therefore most companies are motivated to invest more in order to expand production and profits. But when oil goes and stays below $ 85, as is the case now, many shale oil companies start getting worried, as their profit margins become thinner, given their high production costs.

That said, according to many industry analysts quoted in a recent WSJ story, (US Boom Can Stand Further Fall In Oil Prices, October 30, 2014), many if not most shale oil producers can stay in business with crude prices as low as $ 60 per barrel, or even $ 50. Some can  make money when oil is at 40.

Of course, this does not mean that all of them will prosper, no matter how low the price the oil. Much depends on the size and financial conditions of the company, how much debt they have, and where they are drilling. Relatively unexplored regions usually entail higher risks, and therefore higher costs. As a rule, small oil companies, and there are many of them in the shale industry, have weaker foundations; and therefore they are more vulnerable when profits are smaller.

Reduced investments

Still, according to many of the experts quoted in the WSJ article, most companies should be alright. Of course, much will depend on how long oil prices will stay so low.

If crude prices do not go up, for sure at least some US producers will go out of business. Or, at the very least, they will reduce their investments in new operations. And this could be a real problem.

Indeed, depending on the length of this rather unusual low prices season, fewer investments may put an end (or at the very least slow down) to what has been a veritable US oil boom. To be clear, America will continue to be a major oil producer. But the expansion of its energy industry will not keep this frenetic pace.

America is in the middle of an oil boom

Consider that America –largely thanks to the ability to develop shale oil– has increased its domestic crude production by about 3 million barrels a day in just a few years. Think of that. Unheard of. Assuming buoyant crude prices and sustained investments, the US is now poised to become the world’s largest oil producer, ahead of Saudi Arabia and Russia, something completely unimaginable just 7 or 8 years ago. 

Huge savings, increased energy security

Of course, the issue here is not about the prestige of being “number one”. The issue is huge savings, and an improved balance of payments, while boosting the US economy. On account of its much increased domestic production, America now imports much less oil. This means billions of dollars not sent to OPEC and other oil exporters. This means US wealth spent at home to pay for US produced oil. This means the development of critical energy related know how that later on can be used to develop new resources in other countries. This means tens of thousands of new energy related jobs created at home.

Last but not least, this means enhanced energy security. The less America depends on far away foreign suppliers for the delivery of this absolutely vital source of energy, the better it is.

Can this continue?

So, all told, can this US oil boom continue? May be yes, provided however that old-fashioned Yankee ingenuity will keep surprising us, finding new and better ways to reduce costs associated with shale oil exploration and production. Much progress has been made in a relatively short period of time.

Please, do not forget that a mere decade ago most experts believed that any type of shale oil production was a non starter because it was just too expensive to get this type of oil out of the ground.

More domestic oil is good for America

The unknown here is whether industry can continue to improve its technologies in order to reduce its costs and stay competitive, even when faced with much lower prices and therefore reduced profit margins.

Only time will tell. But it would certainly be a huge benefit for the American economy and for US national security if this incredible oil boom will continue.

 

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