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Drop in Oil Prices Brings Uncertainty


According to Business Insider, the global collapse of oil prices may have a bigger impact on the shale boom than anyone realizes. However the biggest threat may not be to the existing wells in the U.S., but the untapped resources around the world.

 

According to Bloomberg, “Russia, China, Australia, Mexico and Argentina hold some of the [world's] richest shale reserves,” but haven't yet invested in the fracking technology to drill them. Because the price of oil isn't high enough to cover the costs, there's just no economic incentive to start.

The shale oil industry produces nearly four million barrels a day, according to CBS News. But for many producers, it's no longer profitable when oil prices dip below $65 dollars a barrel. It's estimated 60 percent of the rigs in North Dakota's Bakken Shale will be too expensive to operate if oil prices stay below $60.

The international shale projects that are going forward mostly have state backing – in Argentina and China particularly. There are a few state-run oil companies investing in projects in Argentina’s Vaca Muerta basin, according to Bloomberg. But while state backing makes short-term cost concerns less relevant, if prices stay low for too long, eventually it may not be worth it.

The Chinese government seems committed to shale despite the recent drop in prices, but, according to Bloomberg, “has cut its 2020 shale gas production targets to about a third of an earlier estimate.”

But all of this is only accurate until the next oil price swing. This in some ways mirrors the discussion about U.S. shale in the mid-2000s, when oil prices were so low that there was no incentive to invest in new extraction methods. Then, in 2008, prices shot up to almost $150 a barrel, which incentivized the shale boom, according to Business Insider.

The recent drop in crude prices won’t kill off the US shale oil industry. It’ll just make it more efficient, said Fortune. 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 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.