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Working Smarter
How Shale Is Streamlining

The price of oil is more than 40 percent lower today than it was a year ago, and that’s posed a major problem for the American shale boom. Extracting oil from shale is a relatively high-cost process, and many producers are finding it difficult to continue to turn a profit in today’s bearish market. But shrinking profit margins have induced companies to find new ways to keep the oil flowing, and as the EIA reports, it’s not only the firms extracting shale that are accepting reduced compensation for their efforts:

[T]he Bureau of Labor Statistics Producer Price Index (PPI) tracks the rates oil and natural gas service firms are receiving for goods and services used in producing oil and natural gas. Changes in the PPI can be used to examine how prices charged by firms throughout the oil and natural gas industry respond to fluctuations in commodity prices. […]

From June 2014 to May 2015, when the oil and gas prices as measured by the PPI fell by 49%, the PPI by industry classification showed the following changes:

– Rates for drilling activities, which primarily represent service fees for contractors to drill oil and gas wells, declined by 19.6%.

– Rates for support activities, which include the surveying, cementing, casing, and otherwise treating wells, declined by 1.4%.

– The price of sands primarily used for hydraulic fracturing declined 12.5%.

In other words, everyone involved in the industry is taking a cut to his bottom line, and, as a result, shale operations are proving surprisingly resilient in an unkind market. But it’s not just a willingness to stomach smaller returns that’s keeping the shale boom from going bust at $60 per barrel oil. Companies are busy experimenting with different ways to reduce costs and boost output per rig, and that ingenuity is paying dividends.

OPEC isn’t cutting production because it hopes that bargain crude will kill—or at least severely weaken—U.S. shale, but the fracking industry apparently didn’t get that memo. True, forecasts now expect American output to dip slightly next year, but we haven’t yet seen signs of the kind of collapse OPEC seems to be banking on. We can expect shale breakeven costs to continue to come down as producers innovate processes and the oil services industry adjusts to smaller profit margins.

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  • Andrew Allison

    There’s no evidence that “OPEC isn’t cutting production because it hopes that bargain crude will kill—or at least severely weaken—U.S. shale . . .”, and much that the OPEC swing producer (Saudi Arabia) is unwilling to cut production unilaterally and the other members can’t afford to.

    • CapitalHawk

      This is exactly right. The rest of OPEC is begging Saudi Arabia to cut, but they won’t. Given the massive cheating that most OPEC members have engaged in in the past, I couldn’t blame the Saudi’s for that reason alone. But they have a better reason, as has been mentioned in the comments here multiple times, and it’s not Shale, it is Iran.

  • Jacksonian_Libertarian

    “True, forecasts now expect American output to dip slightly next year, but we haven’t yet seen signs of the kind of collapse OPEC seems to be banking on.”

    The problem with forecasts is that they assume that the fundamentals will remain unchanged, that no innovation or cost cutting will occur. The EIA’s forecasts in particular have been miserable, missing by wide margins the rise of Shale Oil. It is foolish to expect them to do any better with an even more competitive market than before. After all it is the “Feedback of Competition” that forces continuous improvements in Quality, Service, and Price in free markets. This means the increased competition will have a significant effect on the entrepreneurial American shale oil developers while having no effect at all on the Government Monopoly owned Oil Monopolies of OPEC or Russia.

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