The American shale oil boom has played a significant role in the country’s economic recovery and a global reduction in oil prices. With fracking technology, shale oil producers have helped the US’ daily oil production increase from five to nine million barrels. However, as crude oil prices remain low, it could be harmful to producers and investors. Below is more info on the topic of shale oil and related investments.
A Decline in Oil Prices
A worldwide decline in crude oil prices is due to a variety of factors, not the least of which is a decreased demand and a sluggish global economy. OPEC’s production decisions put additional downward pressure on the price of oil, and many of the industry’s analysts viewed these decisions as OPEC’s way of harming the profitability of domestic shale oil producers. Finally, an increase in shale oil production helped to drive prices lower by increasing the worldwide supply.
Shale Oil is Costly to Produce
While conventional oil wells can be in operation for years, shale wells have a much shorter lifespan. The average shale well loses more than 70% of its output within two years; to increase or maintain output, a shale producer has to continually locate and start new wells. A conventional well will keep producing oil even after the price drops because prices seldom drop below the extraction cost. Because these wells last longer, they’re more likely to withstand the market’s volatility.
Improved Fracking Tech
Despite the above-mentioned challenges, shale producers have plenty of reasons to be optimistic. Fracking is the way shale producers extract oil, and it is a relatively new technology that will only become more cost-efficient over time. When the price of technology goes down, the per-barrel extraction price will drop and producers will find it easier to stay profitable. A positive factor for producers is that shale is plentiful; new drilling has been launched in Colorado, as well as on the Kansas-Oklahoma border. While smaller companies may not be able to endure market fluctuations, larger firms can absorb the loss.
Low oil prices and the significant burden of mounting debt pose a threat to shale producers, as evidenced by recent bankruptcy filings. The level to which oil prices recover over the next few years may determine the fate of many of the industry’s producers.