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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