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Crude Economics
Shale Companies Found a Way to Be Profitable

The Dallas Fed just issued its quarterly energy survey, and in it are some special questions on what price of oil shale firms need to profitably operate existing wells, and what oil price they need to drill new ones as well. These prices vary by shale basin (and even within shale basins), but overall it looks like most U.S. shale operations would be able to continue to turn a profit even if oil prices were to drop $20 per barrel, and current prices are enough to profitably drill new wells in nearly every shale formation. Here are some relevant excerpts from the report:

Individual responses varied, but average prices needed to cover operating expenses across regions fell in the fairly narrow range of $24–$38 per barrel. Most respondents are able to cover operating expenses for existing wells at current oil prices…

Average breakeven prices to profitably drill a new well ranged from $46-$55 per barrel, depending on the region. For the entire sample, firms need $50 per barrel on average to profitably drill a new well, down from $54 per barrel when the same question was asked last year. Average breakeven prices in the Permian Basin were down to $48 per barrel this year from $51 per barrel last year.

When oil prices started to slide two and a half years ago, most analysts believed the median shale breakeven price was somewhere near $75 per barrel. Since then, prices dipped down below $30 before recovering to the $50 level they hover around today, and along the way the shale industry has trimmed the fat and innovated its way to profitability. The end result is that U.S. oil production is once again on the rebound, up more than 500,000 barrels per day since October, and the industry is looking ready to take advantage of any market share ceded by petrostates desperate for higher prices.

The shale boom is one of the most dynamic energy developments ever, and one gets the sense that we’re watching history being made when companies continue to up oil and gas production even as prices have come down.

It’s good news for the United States in terms of its energy security, but the implications for geopolitics are only now beginning to be felt…

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  • ——————————

    Remember when $100 oil was supposed to tank the global economy…and then $50 oil was supposed to tank the oil industry.

    I’ll bet those predictions were made by those with degrees….

    • Andrew Allison

      Doesn’t everybody have a degree? They’re handed out for 4-6 years of partying and $100K or so in debt which the debtor has no intention of repaying these days.

      • ——————————

        I don’t have a degree.
        In ’75 about halfway through 10th grade I decided that my landscaping and snow removal business was much more financially and intellectually lucrative than school and never looked back.

        Yeah, ever since the government got in bed with academia it has become a disaster .
        Besides the financial mess it has become, there is the damage it has done to society by brainwashing the business world, and even society in general, into believing in it’s level of inportance. And causing a social divide between the educated and the uneducated.
        “Go to college kid or you’ll end up working in a factory”….

        • Andrew Allison

          Congratulations on being smarter than the typical college entrant, the 50% of whom who actually graduate find that there’s no salary premium for what is increasingly being recognized as what high school graduation can, and should, be.

  • Jacksonian_Libertarian

    Who’d a thunk the “Feedback of Competition” driven Shale Oil Developers would dominate the Government Monopoly owned Oil Monopolies? The breakeven prices will continue to drop, as forced continuous improvements are a hallmark of free markets. Monopolies, no matter if they’re organized into a Cartel, will never be able to compete with free markets.

    American Culture is more supportive than any other of free markets, and it shows. Many other countries have shale oil, none of them are adding production like America. Many have given up trying even though they know it’s possible, as the American’s have already done the heavy lifting of blazing the trail.

    • SLEcoman

      I would amend your comment that ‘Monopolies….will never be able to compete with free markets’ to ‘…will ALMOST never be able…’. Examples of where free markets/capitalism don’t win would be situations where substantial spare capacity is needed to ensure dependable supply and the cost to society of even short-term inadequate supply is huge (e.g. firefighting, electric supply). Another situation where government monopolies win is where money is not the key motivator of employees (e.g. why motivated national armies can defeat mercenaries).

  • Proverbs1618

    AMERICA!!!! Booooyah….

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