A lot of people have been ringing their hands lately about the falling price of crude oil. I’m not one of them.
That’s not to say there isn't any cause for concern. Prices are down in the neighborhood of 30 percent, though Brent crept above the $80 mark at the end of last week and U.S. crude ticked up 66 cents, to $76.51. Unless you’re motorists, who get relief at the pump, or refiners, who make more money when oil prices drop, the decline is probably less-than-great news.
Still, this is no time to panic or to utter the dreaded “B” word – bust.
Prices are going down because supply is rising and demand is falling. The U.S. shale revolution has nearly doubled domestic oil and gas production since 2007. Libya is somewhat unexpectedly putting about 900,000 barrels per day into the global market. The Asian economy is slowing down in general, and especially in China, where there are indications that the world’s largest petroleum importer will have its weakest growth in almost a quarter century. (I do want to note, however, that China’s central bank cut interest rates Friday, which helped push Brent prices past $80.)
So it’s a pretty simple equation: Oversupply puts downward pressure on prices. But I’m still not all that worried, for a lot of reasons.
While many of the doomsayers are saying that the only way to stem the price drop is to put the brakes on shale production, they’re forgetting one thing: According to the Department of Energy, only 4 percent of the nation’s shale output needs an oil price above $80 to break even on their investments. So I wasn’t surprised to see last week that drillers are still planning on higher output even in a lower-price environment, or that the Energy Information Administration forecast that production in the Permian, Bakken, and Eagle Ford plays will keep going up.
Companies are also drilling more strategically. As long as prices stay lower, they will shift their focus to more productive areas and cut back activity in the less-productive, less-efficient ones. So they can still extract a lot of oil in the $75 to $80 range and be profitable.
That’s not to say there’s no impact on drillers. We’re already seeing cases where some companies are cutting capital expenditures, reassessing long-range plans, or taking a “wait-and-see” decision-making approach. And there will probably be some consolidations in the future.
At the same time, though, there have been reports that Devon is going to raise output by up to 25 percent next year, Pioneer by up to 21 percent, and EOG by double digits.
Those kinds of numbers hardly signal a panic in the oil patch.
Of course, as has been so often pointed out, oil prices are set on the global market, where OPEC – despite its weakened political clout, thanks to U.S. shale – remains a dominant player. That’s why all eyes will be on Vienna this week, where the cartel meets Thursday. There’s something of a civil war going on between Saudi Arabia, which has opposed a production cut in an effort to slow the American shale boom, and nations like Venezuela, which wants a cut in order to push prices back up.
What will happen at the meeting is anybody’s guess; predicting the outcome of a power struggle is a risky bet at best. For what it’s worth, Bank of America predicted Friday that the organization would cut production by no more than 500,000 barrels per day, as Saudi Arabia puts sales volumes over stopping the slide in prices. We’ll see.
But that’s beyond the control of U.S. drillers. What is in their control is an ability to produce oil efficiently and to adjust strategically as the market shifts. That’s what they’ve been doing, and that’s what they’ll continue to do. So while no one can be certain if prices have bottomed out – though I suspect they have, or are close to it – I think it’s safe to say that the domestic energy boom has in no way run its course.