Shale crash? Not so fast

The conventional wisdom was that shale production couldn't survive the lower oil prices that it brought about by its own success in flooding the market.  What's happened instead is that the pressure of lower prices has wrung cost reductions out of the market:
A Bloomberg analyst suggested that the cost of drilling services have fallen between 20% and 50% with break even prices in parts of the Permian and Eagle Ford below $40 per barrel.
Director of upstream research for Wood Mackenzie, Scott Mitchell forecast that producers could add up to 100 oil rigs by the end of the year.
The article also notes that increased production will require employers to go back to the labor market with their hats in their hands, which will drive up wages and therefore production costs. That's how prices work. Meanwhile, Brits (and New Yorkers) still hate fracking, while Argentina and China lead the world in shale exploration.


MikeD said...

When I first heard that OPEC was trying to depress the price of oil to kill shale and tar sand oil, my initial impression was "you're too late". The time to lower the price in order to kill the technology in its crib was before we had it up and running. Or at the least in the first year or so. But they waited too long. Sunk costs were already done, efficiencies were coming online as the technology was used, and basically, they missed their window.

So none of what you're writing about surprises me. But it is nice to know that I was right. Someone please tell my wife that I was finally right about something (other than marrying her).

Texan99 said...

Excellent point about the timing.

Gringo said...

There is a quote about drilling costs falling between 20-50%. Drilling costs can be rather elastic. Before the 1974-81 drilling boom in the US, drilling services tended to be low profit margin operations. At the drilling peak in 1981, many drilling service operations had 20% profit margins before taxes. With the collapse in demand for drilling services, from the 1981 peak of 4530 rigs to [guesstimate] 600 rigs, drilling service prices went way down. So it's not as if we are seeing something new.

The market at work, once again.

Gringo said...

The longer that oil prices are depressed, the collapse of the Venezuelan regime becomes more likely.

Texan99 said...

That's a shame, because I was counting on them to prop up Greece.