The recent drop in crude prices won’t kill off the US shale oil industry. It’ll just make it more efficient.
Profit margins and break-even points are relative not only to the price of oil, but also to the cost of doing business. As oil prices drop, producers will undoubtedly renegotiate their ludicrously expensive oil service contracts, slash wages for their workforce and cut perks to bring their costs in line with the depressed price for crude. The demand for oil remains strong, which should provide an adequate floor for producers in the long run, but only after they get their finances in order.
How oil prices ever reached $100 a barrel still remains a mystery to many who have followed the industry for years. But the 40% drop in oil prices over the past six months has been shocking for oil bears and bulls alike. Why on earth did it fall so hard, so fast? There is plenty of speculation, ranging from the Saudi’s wish to “crush” the U.S. shale industry, to the U.S. colluding with the Saudi’s to flood the market in order to bankrupt an aggressive Russia and an obstinate Iran.
Conspiracy theories aside, the fact is oil prices have dropped and they may stay “low” for a while. This has analysts, journalists, and pundits running around claiming that it’s the end of the world.
So, what is the absolute lowest price oil can be produced for in the U.S.? Consider this—fracking last boomed in the U.S. back in the mid-1980s, when a barrel of oil fetched around $23. That is equivalent to around $50 a barrel today, when adjusted for inflation. That fracking boom went bust after prices fell to around $8 a barrel, which is worth around $18 in today’s money. With oil last week hitting $63 a barrel, it seems that prices have a lot more room to fall before things get really scary.
image credit Reuters
