Crude Economics
Shale Versus the World

That chart above tells you all you need to know about why OPEC and eleven other petrostates elected to collectively restrain their production last November. That strategy helped push oil prices up between $5 and $10 per barrel, but it hasn’t yet erased the global glut of crude, which means most oil suppliers are still struggling to stay in the black.

A breakeven oil price is the price a given supplier require to turn a profit or, if said supplier is a petrostate like Saudi Arabia or Russia, the price needed to balance the national budget. Even after the slight price rebound over the past four months, Riyadh and Moscow are still far away from erasing their oil-related budget deficits, while the picture looks downright hopeless for Caracas (though that’s not a new feeling for Venezuela these days).

But perhaps even more interesting than these petrostate woes are those two breakeven prices near the bottom of the chart. The lowest, at just $35 per barrel, is a rough estimate of the breakeven price needed for U.S. shale wells currently in operation. There’s little concern in today’s market environment that shale firms might not be able to profitably drill. Shale wells deplete much more quickly than conventional oil projects, so the more relevant metric is the breakeven price for new shale wells, which is somewhere in the region of $50 per barrel. Even with new wells, the outlook for the American shale industry looks strong, given today’s prices.

We should note that shale projects can vary considerably between and even within formations, and that these two U.S. breakeven prices—for new and existing shale wells—are only approximations. That said, the gap between America’s breakeven levels and those of the collected petrostates tells the story of today’s fight for a share of the oil market. Countries like Saudi Arabia and Russia can’t afford to continue on with prices at their current level, but their only lever to alter the price is to constrain their own supply. As we’ve seen already, that plays right into the hands of American producers, who have been eagerly waiting to ramp up their own production should suppliers elsewhere falter.

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