If The Oil Plunge Continues, ‘Now May Be A Time To Panic’ For US Shale Companies

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Over the past 5 years, the shale industry, fabricated or real reserves notwithstanding, has been a significant boon to the US economy for four main reasons: it has been the target of billions in fixed investment and CapEx spending, it has resulted in tens of thousands of high-paying jobs, its output has been a major tailwind for the US trade deficit, and has generally been a significant contributor to GDP (not to mention various Buffett-controlled or otherwise railway corporations). And perhaps, most importantly, it has become a huge buffer to the price of global oil, as the cost curve of US shale is horizontal, with a massive 10,000 kbls/day available within pennies of $85/bl.

Goldman’s explanation:

We believe that the vast reserves that have been opened for development through shale oil in the US have flattened the cost curve meaningfully, at around a US$85/bl Brent oil price. We estimate shale reserves from the top three fields in the US onshore (the Permian, Bakken and Eagle Ford) at around 91bn boe, which to put it in context, is equivalent to roughly one third of Saudi Arabia’s current stated reserves (ZH: this number may be vastly overstated). Most of this resource has become available in the past five years, with few barriers to exploiting the reserves. Production in the US as a result is growing strongly, by more than 1mbpd currently, and we expect this pace of growth to continue over the coming three years as capital continues to be drawn in to these developments. The consequence is that costs of production and E&P capex/bl should stabilise as the marginal cost of production remains stable. We believe that shale oil has become effectively the marginal source of supply, providing the bulk of non- OPEC production growth. This is also the key driver of our oil price view: we continue to expect Brent oil to stay at c.US$100/bl for the coming few years.

For once, Goldman is spot on (even if their Brent price target may be a bit off): with shale oil profitable only above its virtually horizontal cost curve, it means that a whopping 11,000 kbls/day are available as long as Brent is above $85, a clear “red line” for all OPEC producers.

(Read the rest of the story here…)

1 thought on “If The Oil Plunge Continues, ‘Now May Be A Time To Panic’ For US Shale Companies”

  1. Oil is the new gold. I disagree that the lowering of price will cause a disaster. For whom?
    I think the value of the U.S. dollar may just be influenced by our having local oil competing with foreign oil.
    ‘If anything, shale oil might bring the dollar back to value.
    When I was growing up, gasoline at the pump was at approximately 34.9 cents per gallon. It fluctuated from week to week. Then the oil industry did a violation of the Sherman Anti-trust act on a foreign level. It now has fluctuated between 3-4 dollars a gallon influencing all kinds of transportation costs of products all over the country. Sherman Anti-trust was never set up to handle foreign trade. That was done with tariffs. That means your dollar out there was worth 1/10th the value it was in 1966.

    The value of the dollar is based on how cheap we can transport goods from point a to point b.
    Well right now that translates to about $3.50 per gallon of diesel fuel. Many transportation companies are switched over to natural gas as a fuel because it was cheaper. This is a highly competitive market right now and it is going to get more competitive as time goes along. It could mean oil exports that will solve the debt crisis here.
    But that means we have to solve the Oil Monopoly of the Middle East by providing oil from somewhere else to compete with it.
    Now that is what the arabs want to shut down. If we allow that to happen, then we deserve just about anything we are going to get.

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