World oil producers have put oil prices into a free fall, refusing to pare back global supplies in the hopes that low prices will derail the fracking-backed production boom in the U.S. and preserve OPEC's power over world energy markets.
But global analysts are skeptical that the move will work.
The basic reason: Prices remain high enough to keep pumping. "Looking out there, it seems like there's a huge amount of oil that can be produced at $60, $70 per barrel," said Michael Lynch, president of consulting firm Strategic Energy and Economic Research, referring to the prices for Brent crude oil, a global reference point.
Oil prices fell to five-year lows in recent days before rebounding slightly. Brent crude oil is trading at around $70 per barrel, far off the $110 range reached over the summer, while West Texas Intermediate, or WTI ,the main U.S. benchmark, is currently trading in the $67-per-barrel range.
That doesn't mean that the move by OPEC—a 12-nation cartel of oil exporters dominated by Saudi Arabia—won't have an effect on U.S. production. And the steep drop in prices even before OPEC's decision last week to maintain production has already created headwinds for the U.S. industry.
The new landscape is dangerous enough to slow the U.S. production surge and has battered the share prices of energy companies. But the oil output trend will still be upward in the U.S. shale patch, analysts and industry players say.
One reason is that producers can squeeze cost savings from projects.
"Every quarter that goes by, every year that goes by, I think the U.S. producers are getting better and more economical and are sharpening their pencils, so to speak, with the price to drill a well falling, so I think that is hopefully going to help U.S. producers stay competitive in the worldwide oil market, given the 40 percent drop in the price of oil," Dan Eberhart, the CEO of oilfield services company Canary, told CNBC on Tuesday.
In an analysis this week, Citigroup noted that breakeven costs for projects in the U.S. regions with shale oil—the stuff unlocked through fracking—are almost all below $70 in Brent prices, sometimes much lower.
To drill down a bit further, Citi's "base case" projects that if Brent prices stayed in the $75-$85 range, with WTI about $10 lower, "minimal" impacts to shale are expected. Under a separate scenario, with prices collapsing further and WTI around $60, near-term production growth would slow, but production would still be 500,000 barrels per day higher next year.
But the longer-term production outlook could be affected if global prices keep slumping. "Cash flow and planned [capital expenditures] would take a hit but this would be more impactful for 2016-and-beyond production," Citi's analysis states.
The energy consulting firm IHS, in a report last month, said that 80 percent of new production from shale is economic for companies with WTI prices between $50 and $69 per barrel. The company says that productivity gains through technological improvements boost the "resilience" of U.S. production growth.
But make no mistake: The shale patch is at war in the new price market. "What's shaping up right now is kind of a battle royale between the U.S. shale producers and OPEC. It is a case of who is going to blink first," Eberhart said.
While analysts say the shale patch will keep pumping, companies will pull back spending on at least some new projects. Continental Resources, a major producer in North Dakota's surging Bakken formation, had announced plans to delay adding new rigs next year even before OPEC's move.
Looking at oil production more broadly, Guy Caruso, who headed the U.S. Energy Information Administration under President George W. Bush, said, "You will have some effect on new supplies" if Brent prices stay in the $70-$80 range over the next 18 months.
"You are going to see a decline in capital expenditures in the upstream exploration and development that may not affect 2015, but it certainly would affect what you can expect in new growth in North American production in 2016," said Caruso, who is now a senior adviser at the Center for Strategic and International Studies.
Reuters, citing data shared by the firm Drilling Info, this week reported that permits for new U.S. wells dropped 40 percent in November as producers take stock of the new price landscape.
One barometer of the price war's near-term effect will arrive Dec. 9, when the Energy Information Administration releases its next set of monthly forecasts.
In mid-November, as prices were sliding but before OPEC's decision, EIA knocked 100,000 barrels per day off its 2015 U.S. production forecast, to 9.4 million barrels per day, which is several hundred thousand barrels above current levels. But Tuesday's report could trim the forecast even further. Stay tuned.
This article is from the archive of our partner National Journal.
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