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As oil plunges to new lows, what prices are needed for US production to keep humming along?
As oil prices continue their free fall, oil companies in the United States are examining how low prices can go before their operations become untenable in the current market.
The price of West Texas Intermediate is clinging on at $55 a barrel — a fresh five-and-a-half-year low — while Brent crude is at a less-than-optimistic $60 a barrel.
The drop in prices has largely been spurred by an ongoing glut in US oil production, along with OPEC’s refusal to slash output. Indeed, American production this year has seen record highs, and 2015 looks set to deliver much the same — roughly 9.32 million barrels of oil are expected to be produced a day next year, which, while slightly down from previous projections, is still significantly higher than production seen this year.
Those factors have created a dramatic slide in pricing, with major companies looking to slash costs and start share buybacks to limit damage.
Expect casualties…
Jean-Thomas Bernard, a visiting professor at the University of Ottawa, said he sees the US needing prices of $70 a barrel to maintain profits, while Saudi Arabia is able to get by on $5 to $15, the cheapest in the world.
He added that consumers and investors have seemingly forgotten about low prices in the 1990s after a decade of stability.
“We must remember that from 1990 to 1999 every single year the average price of oil was below $20 except for one year. Almost 10 years of very cheap oil,” said Bernard.
The low oil prices of the 1990s helped pave the way for an influx of sports utility vehicles and light trucks that require a large amount of fuel, and have become commonplace in today’s world, said Bernard. In turn, oil prices rose and saw widespread stability for the decade.
But as the ongoing price war continues, he expects casualties.
“If there is a price war, then the first casualty will most likely be shale oil. Then it’ll hit the development of new oil sands in Canada,” he said. “There will be a price war until some players are pushed out of the market.”
…and production cuts
As the price rout deepens, other market watchers are expecting production to be cut.
“We’re going to lose production, that’s for sure. All the arm waving right now is about how much,” said Michelle Michot Foss, chief energy economist with the Bureau of Economic Geology Center at the University of Texas. Foss estimates that anywhere from 25 to 50 percent of current production could be cut in the coming years.
However, Foss doesn’t believe that the price war is between the US and Saudi Arabia, and argued that it is a greater sign of a struggling world economy.
“The global economy stinks — I mean it stinks. Even Asia hasn’t been that great, and everyone has been betting on Asia,” she said, warning that she isn’t able to predict where the price of oil will bottom. “I think it will last years, I don’t think this is short term.”
She concluded, “the US is marginally better than everyone. Europe is still awful, all the emerging markets are crumbling, Asia — where everyone has been targeting for sales of anything — is actually not in great shape. Where does this stuff go? That’s the question.”
Securities Disclosure: I, Nick Wells, hold no direct investment in any of the companies mentioned in this article.
