According to the US Energy Information Administration (EIA), US oil production continues a steady upward climb despite lower oil prices. Increased domestic oil production has benefited the US by increasing employment, increasing revenues of state and local governments, lowering oil imports, and reducing the trade deficit. This oil production renaissance is the result of hydraulic fracturing and directional drilling technology that has made it profitable to produce oil from shale formations. As oil prices have fallen, the question being asked by many is: ‘At what price does shale oil become uneconomic to produce?’ Some believe it begins at US$ 80/bbl; others see it hitting as low as US$ 50/bbl. What is clear is that it depends on the shale formation and the difficulty of capturing oil from it. Therefore, a range of prices between US$ 50 – US$ 80/bbl should not be surprising.
Declining US petroleum imports
The Institute for Energy Research (IER) reports that the US oil renaissance has helped to increase the supply of oil worldwide due to the nation’s lower import volumes. US net oil imports dropped from 60% of US oil consumption in 2005 to 33% in 2013. That percentage has declined further to 28% at the end of September 2014. And forecasters believe that the percentage will decline to the low twenties as US oil production continues to grow. The lower net export number is partly the result of increased exports of petroleum now totaling 4 million bpd , consisting mostly of petroleum products that do not have a limit on their export level. Net petroleum export shave increased by a factor of 3.4 compared to 2005, the IER reports.
Since the mid-1970s, the US has run a deficit in merchandise trade, i.e. payments for imports have exceeded receipts for exports. This deficit on the merchandise trade balance reached a maximum of US$ 883 billion in the second quarter of 2008. Crude oil and petroleum products have played a significant role in the balance of US trade accounts, according to the IER. Since 2009, exports of petroleum and petroleum products have reduced the trade deficit.
Oil price dynamics
Stagnation in world economies has produced a slack in world oil demand and a supply glut in global oil markets has resulted in a drop in world oil prices of approximately 25% since June. This is largely due to global oil markets adjusting to surging production in the US and to slower growth in China’s economy that has impacted its demand for oil.
Normally, OPEC would cut production to keep prices high rather than let them dip to below breakeven point where oil exporting countries can balance their national budgets. However, Saudi Arabia, OPEC’s swing producer, has decided that it wants to maintain market share and therefore has not supported an oil production cut back.
Saudi Arabia produces approximately one third of OPEC’s oil, approximately 9.7 million bpd. Some believe that the Saudis are agreeing to lower oil prices now to curb new investment and further increases in global supply, particularly from US shale formations and Canadian oil sands, thereby gaining higher revenue in the medium term.
The economics of shale oil
Will the Saudi strategy work? The question, of course, is at what price does shale oil production in the US remain economic?
According to Michael Yergin, vice chairman of IHS CERA, oil prices in he US at US$ 75 – US$ 80/bbl will be sufficient to maintain ‘a pretty high momentum’ of shale oil and gas production.
According to the International Energy Agency (IEA), only approximately 4% of US shale oil projects have breakeven prices of more than US$ 80/bbl. And approximately 98% of crude oil and condensates in the US have a breakeven price of below US$ 80 and 82% have a breakeven price of US$ 60 or lower.
According to Matthew Jurecky, head of oil and gas research for the London based research company Global Data Ltd., “The profit margin on most commercial unconventional oil plays will support prices as low as US$ 50, many below that even”.
Hence, IER holds that shale oil production is profitable at today’s lower world oil prices since US prices were averaging approximately US$ 85 – US$ 90/bbl through its boom, despite the world oil price measured by Brent crude being well over US$ 100/bbl. US oil prices were lower than world oil prices due to the lack of storage and pipeline capacity to move it to processing centres. Yet in the past five years, more than US$ 500 billion of private investment went into hydrocarbon infrastructure.
Shale oil production is getting more efficient, which means that shale oil producers can accept a lower price and still make a profit. Drilling techniques today, including horizontal drilling, hydraulic fracturing and information technologies that accurately locate where to place rigs, are far more productive than when the shale oil boom started. According to the EIA, the quantity of shale or natural gas produced per rig has increased by more than 300% over the past four years.
Further, the US’s hydrocarbon infrastructure is enormous and diverse. The US has many world class fields that are increasing production at double digit rates. If and when profit margins erode to low oil prices, American entrepreneurship will most likely produce new shale oil production techniques.
Institute of Energy Research opinion
According to the IER, slow oil demand growth from stagnating economies; an oil supply glut, primarily from US shale oil production; a slowing in China’s economic expansion; and continued OPEC production without cut backs has resulted in a world price decline of approximately 25%. Despite this, US oil production keeps increasing, thwarting what could be an effort by Saudi Arabia to prevent such increases by trying to price US shale out of the market.
Adapted from IER analysis by Emma McAleavey.
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