If the Saudis wanted to crush America's shale oil industry they are certainly doing a good job of it.
West Texas Intermediate reached a 2014 peak of $107.73 in June before dropping as low as $49.77 today on the New York Mercantile Exchange. The grade settled at $50.04 a barrel. That’s below the break-even price for 37 of 38 U.S. shale oilfields, according to Bloomberg New Energy Finance.Shale oil fracking and Canadian tar sand is some of the most expensive (and dirty) oil production on the planet, while conventional Persian Gulf oil is the cheapest to produce.
Warren Henry, the spokesman for Continental, one of the frackers who have been spending money faster than they can make it, says that current oil prices are “not a sustainable long-term trend.”
However, Bob Tippee, Editor of Oil & Gas Journal, has a different take.
"The Saudis have no incentive to lower supply to defend the price of crude oil, that is kind of a given right now, so the Saudis are not going to rescue the market," said Bob Tippee, Editor of Oil & Gas Journal.It won't come from other major producers either. Both Russia and Iraq have boosted oil production to their highest levels in decades.
So it seems certain that low oil prices are here to stay. At least for now.
And that's bad for the oil patches of red states like Texas and North Dakota.
The slump may push Texas into a “painful regional recession,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, wrote in a Dec. 18 report.The majority of Texas energy production is still by conventional means. North Dakota, on the other hand, relies heavily on fracking, so they are looking at hard times.
Texas pumps 37 percent of U.S. oil output, EIA data show. The oil and gas industry accounts for 11 percent of the state’s economy, according to Feroli. The effects may extend to housing and other businesses, he wrote.
Already oil rigs are being shut down at the fastest pace in six years.
“At $50 oil, half the U.S. rig count is at risk,” R.T. Dukes, an upstream analyst at Wood Mackenzie Ltd., said by telephone from Houston. “What happened in the last quarter foreshadows what’s going to be a tough year for operators. It’s looking worse and worse by the day.”Employment in the support services for oil and gas operations has risen 70% since mid-2009. Employment in oil and gas extraction has risen 34% over the same time period.
The thing to remember is that most job creation in the fracking industry comes up-front, so job losses will hit long before production falls.
The most labor-intensive aspect of the oil-field industry is the construction and completion process for new wells, which requires the bulk of investment and provides the most income to the local economy.The price began crashing a couple months ago so the layoffs notices will really pick up on the oil patches any day.
He predicts ramifications of the oil slide to show up in three to six months, because companies will complete works in progress according to contract.
The Dallas Federal Reserve projects Texas will lose 125,000 jobs by the middle of this year.
This slowdown is already projected to effect the state budgets of Texas, Wyoming, Louisiana, Oklahoma, North Dakota and Alaska.
Some will point out correctly that oil sales from production is sold months or years ahead of time, so a temporary drop, no matter how steep, doesn't have an immediate effect.
That statement is true, but it comes with two big caveats.
First of all, there is no way of knowing when those oil futures were agreed to. They could expire tomorrow, or three years from now.
The other caveat is specific to the geology of fracking. Unlike traditional oil drilling, shale oil taps out very quickly. That is simple geology.
the average decline of the world's conventional oil fields is about 5 percent per year. By comparison, the average decline of oil wells in North Dakota's booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year.The IEA states that the shale oil business needs to bring 2,500 new wells into production every year just to sustain production, and these shale fields will increasingly become more expensive to drill, “a rising percentage of supplies…require a higher breakeven price.”
Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic.
With the current price of oil, almost none of the frackers will be sinking new wells. So if oil prices stay down, most of the frackers will simply be out of business in a year because they will have stopped producing enough oil for their business model.
This is a big reason why the Saudis, with their conventional oil production can wait out the frackers.
Of course, there is another factor that needs to be considered when it comes to the fracking industry, and that is high-yield debt.
“Anything that becomes a mania—it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”Far too many fracking companies have managed to stay in business by virtue of cheap credit. Being shut out of the bond market for these companies has the same effect as a bullet in the head.
“It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now,companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.
Gary C. Evans, chief executive officer of Magnum Hunter Resources Corp., calculates that the funding squeeze for the frackers will hit in March or April.