OPEC’s decision to stand pat last week and maintain current crude production levels sent oil prices down to nearly five-year lows on Monday. It also prompted a couple of big related questions: Is OPEC deliberately trying to smother the U.S. oil boom, and will it be able to?
The heavy hitters inside the oil-exporting cartel certainly give that impression. By leaving the taps open and pushing prices down, the idea is to make it less economical to produce oil from fracking, which is more expensive than pumping oil in big, traditional Middle Eastern fields. OPEC’s secretary-general, Abdalla El-Badri, said after last week’s Nov. 27 meeting that the decision was OPEC’s way of answering the glut of light, tight oil unleashed by the U.S. energy revolution. And Iranian officials said that, in backroom meetings, Saudi officials were especially worried by the threat posed by rising U.S. oil production.
Granted, the Organization of the Petroleum Exporting Countries is hardly monolithic. Its decision to keep oil production unchanged is probably less a concerted strategy to dent U.S. output than a reflection that the disparate group historically takes time to reach consensus. OPEC’s big producers, led by Saudi Arabia, also want to convince smaller producers to share any pain from output cuts — something that will be easier after a few more months of relatively low oil prices.
Regardless of whether it was OPEC’s intention or not, with U.S. oil prices trading in the high $60s per barrel for the first time since the summer of 2009, the economic climate for U.S. oil production is, on paper at least, more challenging than it has been in years.
But that doesn’t mean that sub-$70 oil will kneecap the U.S. boom anytime soon. For starters, prices will have to remain depressed before U.S. oil producers pack up their rigs for good. If oil prices stay steady through all of 2015 — a big if — energy analysts expect U.S. production growth to drop by 500,000 or 600,000 barrels. That wouldn’t be enough to cure the crude overhang that is weighing on markets today.
But most importantly, thanks to technological advances, it has gotten steadily cheaper to produce tight oil from blasting apart shale seams deep underground. That means that the “break-even” oil price for U.S. producers is getting lower all the time, making the industry more resilient to price dips. If the United States needed $80 barrels a few years ago, it can comfortably manage today with prices close to $70, data from different shale plays show. Daniel Yergin, head of energy consultancy IHS, says that 80 percent of U.S. tight-oil production can survive with oil below $70 a barrel.
Norway’s Statoil, which has become a big player in North America, makes clear what’s driving the change: technological advances that lower the cost of drilling each well. Costs have fallen 50 percent in two years, the company said, and could keep falling another 15 percent by 2016. At the same time, producers are now squeezing out more oil than they used to. The upshot, Statoil says, is fewer wells, at lower cost, with greater overall production.
That isn’t to say that the industry can completely shrug off lower oil prices. Even if the wells themselves are still profitable, oil companies need a constant influx of cash to keep operating. Brown Brothers Harriman, the investment bank, said that lower oil prices could crimp the easy credit that many operators need to keep prospecting, which could curtail the expansion of U.S. oil output. That most shale plays can survive with lower prices underscores that some can’t; those more expensive projects will likely get curtailed if oil prices stay depressed through the first half of next year.
Could it also be that the US has induced its long term partner Saudi Arabia to cooperate in starving Putin?
