The War on Shale

In this Sept. 17, 2015 photo, Part of the 4L RV Ranch is mostly empty, in Gonzales, Texas. To see what’s at stake for Texas in a shrinking oil economy, one need look no further than Gonzales, 65 miles south of Austin and in the central portion of the Eagle Ford Shale area, which stretches roughly 50 miles wide and 400 miles long in a sweep across what were once some of South Texas’ poorest counties. (Jay Janner/Austin American-Statesman via AP)

I’m only posting this in order to explain why not to worry about it:

To their credit, shale drillers and operators in Texas and North Dakota have hung on for far longer than anyone expected after Opec launched its pre-emptive oil price war last November. However, a year of oil prices trading at an average of around $50 per barrel is finally succeeding in reversing the dramatic increases in US production that had been so troubling the Gulf’s oil-rich sheikhs.

Total US output has fallen by almost 600,000 barrels per day (bpd) since the end of the first quarter, with the biggest declines occurring recently as operators begin to crack under the financial pressure caused by Opec’s squeeze on prices. By next year, the US government expects output to decline to an average of 8.6m bpd, down from an average of 9.3m bpd in 2015.

It was only a couple of years ago that $70 crude was going to put US shale out of business, but our frackers are so damn good that they’ve brought their breakeven price down by nearly a third in a remarkably short period of time. Yes, there’s still a floor under fracking production, but more importantly the ceiling on Saudi prices is that much lower. Every time the Saudis try and raise prices above that ceiling, another Texas or North Dakota shale field will come back into production.

And the other thing to remember is that our shale isn’t going anywhere — it will just sit there underground, as our frackers wait for better market conditions or improved fracking techniques.

The Saudis can’t wait us out; they can only learn to make do with less.