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Listen Up OPEC
Don’t Bet Against American Innovation

OPEC, led by its biggest producer Saudi Arabia, has so far chosen not to cut production to stabilize the plunging price of oil, instead apparently happy to duke it out with American shale producers for market share. With oil now going for less than half of what it was last June, oil exporters are running up massive budget deficits, while U.S. shale producers are ratcheting down their growth forecasts as fewer plays can be economically exploited. The Saudis are playing a game of chicken with American shale, but they may regret that gamble, as producers are already busy finding ways to keep the crude flowing in this bear market. The Economist reports:

Technology is continuing to change the industry’s economics. Halliburton is pushing ahead with upgrades to the equipment and techniques it uses at drilling sites, including improvements to pumps and storage systems. All this, the company says, can cut a typical well’s capital spending by a quarter, maintenance by half, labour by a third, and development time by more than half, compared with the previous approach. So far 30% of its North American operations have been upgraded. The aim is to reach 50% by the end of the year.

Such new techniques, and falling costs for everything from rigs and pumps to steel and labour, are helping the drillers who are still in business. “We used to think everything worked at $80-85 per barrel. Now it’s $70-75,” says R.T. Dukes of Wood Mackenzie, an energy-consulting firm. Looked at another way, he says, two-thirds of the shale drillers needed oil at $70 to break even. Productivity gains and lower costs have now pushed that down to $60 (though that is still uncomfortably higher than this week’s crude price).

Shale drilling is still a remarkably young process, and operators are still finding ways to get more oil and gas out of the ground for less money and time. The margins may be slimming, and drilling in some of the more expensive formations may be tapering off, but there’s no sense that the industry is fated to retrench. OPEC take note: it’s generally not a good idea to bet against America’s ability to innovate.

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  • Frank Natoli

    American “can do” was able to flex its muscles for shale oil only because the shale oil lay under private land. The trillion barrels of conventionally extractable oil under Alaska ANWR, Pacific, Gulf and Atlantic coasts are merely waiting for “the people” to tell Obama, Pelosi and Reid types to pack their bags. Who knows? We all may actually be able to walk around our homes in the winter without having to wear sweatshirts and long johns.

  • Andrew Allison

    It is far from apparent that OPEC is “happy to duke it out with American shale producers for market share.” Judging by the squeals from Iran and Venezuela, many members of OPEC are feeling more pain that the U.S. shale industry. Perhaps we should give some credence to the idea that the Saudis are simply intent on maintaining market share against any and all competitors, and keep in mind that the price which OPEC members need to balance their budgets bears no relationship to production costs.

  • FriendlyGoat

    People who know me here as the “village liberal” (yes, I know there is another word sometimes used with village) might be surprised to hear me say that I don’t think it would be an all-bad idea for our government to assist our soon-struggling shale producers to keep them pumping—–temporarily and within reason, not a forever giveaway. Depriving Iran, Iraq, ISIL, Russia, AND Saudi Arabia of oil revenues for as long as possible at this particular moment seems like a good idea to me.
    I also think, OF COURSE, that we should still be subsidizing the so-called green technologies too.

    • Andrew Allison

      What on earth makes you think that anybody here would be surprised that you are in favor of subsidizing any-and-all cost-ineffective, energy, or otherwise, projects? Throwing taxpayer dollars at any problem is the progressive credo. Has it perhaps escaped your attention that, while not growing as fast as it has in the recent past, the national debt is growing. When (not if) interest rates return to normal levels, the share of government revenues required to pay the interest on this debt will require more, unrepayable debt. As Greece discovered, this can only continue until lenders figure this out.

      • FriendlyGoat

        1) Frackers are thought to be the enemies of some liberals. I think I’m perhaps noteworthy (notorious, probably) for suggesting we not let the smaller ones go down at the whim (goal) of Saudi Arabia. Consumers in the USA are suddenly saving so much money from lower oil that we can easily afford in the short term to assist the small shale players, but we can’t wait very long to do it. Their financial situations are reportedly getting desperate quickly.

        2) The world interest rate market is not signalling normalization of interest rates. It may not happen in our lifetimes.

        • Andrew Allison

          Dream on!

          • FriendlyGoat

            I always do, as you know. NOW is the time for the USA to respond with the economic slap we should have given Saudi Arabia for its role in flying 15 hijackers into the World Trade Center. They think we’re going to roll over to their oil play—-and we shouldn’t.

  • Sonny Virk

    I like this game of chicken. In fact, lets add fuel to fire by increasing fuel efficiency standards and thus lower demand. People win including those who feel patriotic by driving gas guzzlers. Now whenever there is terror attack or another state legalizes same-sex marriage or accepts obamacare, little Ned Tugents put on their 5 gallon hats and run out screaming and get into their hummers or F150s drive arrive around in circle while shooting randomly till there they get lost in the petro fog. Funny sight. God bless America. Real America I mean. Rural, south and GOP.

  • Jacksonian_Libertarian

    American shale oil developers exposed to the “Feedback of Competition” vs. OPEC’s corrupt state owned oil monopolies. I know which side I’m putting money on.

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