Falling oil prices and and US shale drillers drowning in a sea of debt

[schlimm]

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11231383/Oil-price-slump-to-trigger-new-US-debt-default-crisis-as-Opec-waits.html

According to Baker Hughes, the number of rigs targeting shale oil in the US fell to the lowest level since August this week. Drilling companies in the massive Eagle Ford shale area of Texas shut down rigs at the fastest rate...Politically, cutting production is always a move Opec ministers are reluctant to take. Given the fragile state of the world economy and the opportunity to be seen in Washington to add economic pressure onto Moscow, it would be easy for the group to sit on its hands by keeping its quota unchanged and instead focus on compliance.  If this scenario plays out then US shale oil producers will be the biggest losers. Of course, falling oil prices will also have a positive impact on major industrialised economies, helping to keep a lid on inflation and providing a welcome boost to consumption, which should follow on from lower fuel and energy costs for the general public."

Winners and losers.

[MidlandMike]

The article's graphs show that the breakeven costs for the US's prolific Eagle Ford field is lower than any of the top Mid-eastern OPEC producers.  Even other top US shale fields (such as the Bakken and Niobrara) costs are less than any OPEC country except Kuwait.  When the oil price drops, US drillers shut down rigs, but high cost Mid-east countries dip into their cash reserves to keep production going.  Hard to see how the US will be the big loser.

[YoHo1975]

VOX.com's article on the OPEC price war with the US quotes the international Energy Agency as saying only 4% of US Shale oil projects need a price above $80 to be profitable and many projects in Bakken are profitable down to $42 a barrel. It's really Iran and Venezuela that are in trouble. They need prices above $100 to avoid tanking their economies. VOX article: http://www.vox.com/2014/11/28/7302827/oil-prices-opec

[jrbernier]

Schlimm,

  This is typical UK tabloid stuff.  While oil prices are dropping due to excess demand, the Opec countries could not agree to do anything to control production.  The problem for them is that North Sea oil is close to it's main market, US oil production is close to it's domestic market, and the shipping costs of moving Opec oil to market is too costly.

  While it is true that the Eagle Ford area has too many drillers, this is sort of normal as gas/oil deposits are exploited.  You might want to read RBN blog on this situation:

https://rbnenergy.com/crying-time-at-opec-price-crash-follows-cartel-punt-on-production-quotas

Jim

[MidlandMike]

"Tabloid stuff" sounds like a good discription of the original article.  To compare the drillers debt (which was class B and C) to the US housing bubble debt (which was mischaracterized as secure) is beyond the pale.  In the 80s when 9 out of 10 drilling rigs were shut down, this did not cause a financial crisis. 

[SALfan]

YoHo1975

VOX.com's article on the OPEC price war with the US quotes the international Energy Agency as saying only 4% of US Shale oil projects need a price above $80 to be profitable and many projects in Bakken are profitable down to $42 a barrel. It's really Iran and Venezuela that are in trouble. They need prices above $100 to avoid tanking their economies. VOX article: http://www.vox.com/2014/11/28/7302827/oil-prices-opec

 

Oh darn the luck, low oil prices may wreck the economies of terrorist-supporting Iran and Marxist-run Venezuela.  Boo hoo.  That would be a serendipitous unintended benefit of low oil prices.  

[Euclid]

The premise of the article seems to be that current U.S. oil production expansion through fracking was a mistake that will ruin our current economic recovery.  The author flippantly compares the U.S. oil expansion investment to the subprime mortgage overreach.  In my opinion, the analogy is defective. 

In the first place, it assumes that prices are falling because Bakken has created an oversupply in the world market.  But other sources say the oversupply has been created by falling demand worldwide because of general worldwide economic slowdown.  To the extent that the latter is true, the new Bakken production was not a mistake that will ultimately ruin the current U.S. economic recovery. 

In fact the falling world economy might itself take down the U.S. economy with it.  Or it might be that the U.S. recovery is overstated for political reasons, and is in fact helping drag down the world economy.

In checking other articles, I see that some experts are claiming that falling oil prices represent such an extreme windfall benefit to consumers, that western governments should seize the opportunity and embark on massive spending for infrastructure improvements.  In other words, governments must find another way to spend all the money going into consumers’ pockets or else it is likely to wreck the U.S. economy. 

But is it even true that consumers are benefitting from falling gas prices?  Consumers love falling gas prices, but if they are caused by a recession, saving a few dollars on gas might come at the price of losing one’s job.