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Crude Economics
Irrepressible US Shale Defies OPEC

When OPEC, led by Saudi Arabia, chose not to cut production last November, it effectively consigned its members to a prolonged period of low prices and the financial strain, palliated only by the hope that the bear market would soon squeeze American shale producers. The petrostate cartel essentially abdicated its market-fixing role on a bet that the relatively high cost of hydraulic fracturing would make American firms the world’s new swing producers, but as the FT reports, that bet is looking more and more suspect:

[S]o far, overall US output seems to be only levelling off, rather than collapsing. If US crude stays at its present level of about $45 per barrel, then it seems likely that production will start falling later this year. But Wood Mackenzie, a consultancy, is forecasting that US oil production will grow this year and next, if there is a rebound in prices to about $60 per barrel. […]

The cost cuts and productivity gains that shale oil producers expect come in three categories…First, there are savings from putting pressure on suppliers of drilling rigs, hydraulic fracturing and other services. Companies have generally been saying they expect reductions of 20 to 30 per cent this year.

Second, companies benefit from focusing spending on their most productive assets. “You’re dropping all your worst-performing rigs and worst-performing rig crews and moving the rigs you have to your core areas,” says Randall Collum of Genscape, an energy research firm…Finally, there are productivity gains available from improved techniques.

OPEC is now saying that it expects U.S. production to possibly taper off in late 2015, certainly later than most member countries would like. Every month that American output continues in the face of cheap pricing puts tremendous strain on petrostate regimes that rely so heavily on oil sales for budgetary revenue. The Saudis have a sovereign wealth fund big enough to allow them to weather these market conditions for another 20 years, but the rest of OPEC is not so well-prepared.

The cartel is next scheduled to meet in June, but all signs point to continued inaction as the group battles for its share of an oversupplied market. Meanwhile, U.S. companies will continue to find ways to bring down their own costs. We’ve said it before, but it bears repeating: bet against American innovation at your own peril.

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  • Frank Natoli

    When there is close to one trillion barrels of conventionally recoverable oil under Alaska ANWR, Pacific, Gulf and Atlantic coasts, why is no new drilling planned in any of those areas? Why is the U.S. restricting itself solely to oil recovered by hydraulic fracturing?

    • Karadion

      Doesn’t take a genius to know why that is. Blame Reid’s obsession of the Caribou’s *cough* Sierra Club *cough* sorry I got something in my throat.

    • richard40

      The radical environmentalists wont let any new drilling happen on public lands. That is why all the US oil boom has happened on private lands, because the radical environmentalists have only a limited ability to stop that. In a way though, this may be OK for the long term, because if oil ever did really get scarce in the distant future, we would still have all those previously unavailable sources to look for more.

  • Jacksonian_Libertarian

    “The Saudis have a sovereign wealth fund big enough to allow them to weather these market conditions for another 20 years, but the rest of OPEC is not so well-prepared.”

    No they don’t, not at their present level of spending.
    10 million barrels per day x 365 = 3,650 million barrels per year
    $96 per barrel need to balance their budget – $50 per barrel present price = $46 per barrel loss
    $46 x 3,650 million barrels = $167.9 Billion
    Saudi Arabia’s sovereign wealth fund starting amount ~ $700 billion (already been tapped in 2014) / $167.9 billion = 4.17 years at present prices, that’s 1/5 of the 20 years being touted.

    • Karadion

      You already stated it yourself. Their chest is around $700 billion and their annual budget is $230 billion and their revenues for 2015 was $190.7 billion leaving a shortfall of $40 billion at the current price of $45~. So they can maintain that deficit for at most 20 years before their chest depletes and then they can start panicking.

  • TMLutas

    Politicians can easily improve the prospects of domestic producers while putting more pressure on the world’s petro-tyrannies. They can modify the crude oil export ban and US frackers get about $8 extra per barrel. That’s the price difference between the world benchmark, Brent crude (Brent), and the US benchmark West Texas Intermediate (WTI). In a free market where the law wasn’t getting in the way, those two numbers should have very little difference. That hasn’t been true for several years now. You don’t even have to fully get rid of the ban (though that would be my policy preference), just provide a mechanism so that when we are in danger of running out of storage space for all the oil we’re drilling, we can export.

    • Donald Campbell

      The only thing to expect from politicians is to be a boat anchor to American progress in oil and any other industry.

      • TMLutas

        I expect government run enterprises to have a productivity improvement gap to private enterprise. That’s why communism doesn’t work, that gap. Thus your boat anchor comment is something I agree on entirely.

        I do expect the politicians to do their best to minimize the gap. Otherwise I’d be an anarchist.

        • richard40

          “I do expect the politicians to do their best to minimize the gap. ”
          You are overly optimistic. Yes politicians will try a little to make gov work, but it is not their top priority. Their top priorities, in priority order, are:
          1. Getting elected.
          2. Using gov to help themselves.
          3. Using gov to help all the cronies who helped them get elected.
          4. Using gov to harm the political opposition, and their cronies.
          5. Using gov to please the swing voters they need to get elected. (note this leaves out 2 blocks, one is voters who they know wont vote for them, and the other is voters who will always vote for them no matter what, they both get nothing in this step)
          6. Doing/saying some things that look good (but may or may not actually be good) to ordinary voters (this may even include non swing voters, to either rev up base turnout, or reduce the intensity of the opposition).
          7. Doing something they always believed gov should do even if it does not help them get elected.
          8. Doing something they know is necessary for the health of the nation, even if it is unpopular.
          9. Doing all of the above while keeping gov as efficient and economic as possible.

          Note that the thing you expect politicians to do is dead last, and if they are really into points 1-4 it may never happen at all, and in fact may get worse.

          • TMLutas

            You do want to pick a fight with me. Sorry, not happening. Suffice to say, we’re probably voting for the same people but using pretty dissimilar logic paths to get to the same destination. I can live with that. I hope you can too.

          • richard40

            We definitely agree on the failure of communism, and even on one of the reasons for it. You may have a little more faith in most politicians than I do, my post was pretty cynical, but given what I have seen recently pretty close to true.

  • Dracovert

    Fracking costs are not a monolithic entity. Some fracking operations are low cost and some are high cost but most are lower than what OPEC needs. Consequently, when the price of oil goes up, more fracking production will come on line, still below the needs of the Ayatollahs. Life is hard for militant Islam psychopaths.

  • mesocyclone

    The interesting geopolitical implication of this is that Iran and Russia are heavily dependent on oil prices. That Saudi Arabia is allowing prices to fall is not a coincidence.

  • AriTai

    Wonder if zero interest rates has resulted in (1) not only in taking from the old and giving to the young (all the elderly widows I know living off of 10 year bond ladders are losing principal – so much for ant vs grasshopper rewarding the thrifty – I hope they remember to thank the Dems for making the cat food story real at the next election) – but does ZIRP also mean (2) that the banks are financing much of the shale boom? And have the most to lose if these firms go under? Interesting political bedfellows.

  • richard40

    The petro dictators cant win economically, because the US oil people are too good at innovations which lower costs. That is why the petro dictators are donating big dollars to radical environmentalists, since their only real hope is for corrupt elements of our own gov to kill the shale/fracking boom.

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