May 12, 2015

LAST YEAR IN NEW YORK, I HAD DINNER WITH A GUY WHO DOES A LOT OF FRACKING. “YOU’RE SAVING WESTERN CIVILIZATION,” I TOLD HIM. U.S. Shale Gets Ready to Take on Price Rebound.

After plunging 50 percent from a high of over $110 per barrel, the price of crude has been on the mend in recent weeks, back up to around $65 per barrel from a low of $47 in January. This has been driven in large part by slowing growth in American production as high-cost shale producers struggle to turn a profit in a bearish market. But, as the FT reports, prices aren’t likely to edge up much higher before U.S. fracking booms anew. . . .

Up until last summer the world was getting used to oil at over $100 per barrel, but shale precipitated the last year’s price plunge and looks set to prevent any return to what can now be called the old days.
American shale firms have had to scale back production, true, but as they’ve done so they’ve also been hard at work finding ways to refine processes and cut costs to stay profitable in today’s market. Even as the industry has worked on reducing its breakeven costs, it’s been squirreling away crude in storage tanks and drilled but not yet fracked wells, creating what’s being called a “fracklog” of oil that companies are ready to sell on the market just as soon as prices tick upwards.

The upshot of all of this is that once crude prices rise much higher than where they are, we can reasonably expect U.S. production to rise with it, further contributing to the global supply glut and eventually bringing prices right back down. By choosing not to cut production, OPEC, led by Saudi Arabia, has given up the mantle of the world’s swing producer, and in their own way American shale firms have assumed it.

I meant what I said, and I was right.

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