If you haven’t heard, the price of oil in world markets is plummeting. Brent crude, Europe’s benchmark, is hovering around $91 a barrel, less than two months after some predicted it would stay above $100 forever, while in the US, the West Texas Intermediate (WTI) benchmark is down below $87 a barrel. These prices are a function of both supply and demand, but they also affect each in turn. On the supply side of things, there’s a growing worry that if the price of oil continues to drop, shale formations—which are technically difficult and relatively expensive to exploit—will cease being profitable. Bloomberg reports:
“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, which advised 38 percent of U.S. energy mergers and acquisitions this year, said in an Oct. 1 interview. “It will be uncharted territory.” […]
Shale oil is expensive to extract by historical standards and only viable at high-enough prices, Ed Morse, Citigroup Inc.’s head of global commodities research in New York, said by phone Sept. 23. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.
“There is probably something to the notion that if prices fell suddenly to $60 a barrel, the production growth would turn negative,” he said.
The requisite price of oil for producers to profitably drill varies across American shale formations, so there’s no single number to point to as an indicator that the shale boom is in jeopardy. But should WTI crude start trading in the $70 to $80 per barrel range, U.S. crude production would start to be affected.
This serves as a timely reminder that energy independence is a myth; oil is a globally traded commodity, and the goings-on abroad, both on the supply (with Libyan crude coming back online) and demand side (with slower growth in China affecting projected crude imports there), can still affect America’s energy concerns. Oil is a globally traded commodity, and even if we produced enough oil to no longer need imports, unless we decided to go full isolationist, we’d still be affecting by global pricing of the stuff.
We may be more energy secure these days, but U.S. shale producers will still watch global markets and the events that affect them closely.