Free Markets, Free People

The power of the market, proven again …

We were told that while oil prices were high, shale oil could be produced at enough of a profit to drill, but to expensive to continue if the prices dropped.

But efficiency and technical innovation have overcome that bit of conventional wisdom as Shale Energy Insider reports:

US shale companies have increased the number of rigs in the field for the first time in nearly seven months when oil prices were trading around $70 per barrel, compared to under $60 per barrel in the current market.

The number of rigs rose in almost every main shale basin across the US according to data gathered by Baker Hughes.

Industry experts have suggested that as a result of last year’s price crash, shale exploration firms have cut their break even costs by anything up to $20 per barrel.

As much as anything else, the rise this week is a testament to break-evens coming down just over the course of this year,” said James Williams, president of energy consultancy WTRG Economics.

Shale is a lot more resilient than we thought it was, and it means we’re going to be able to keep producing shale oil at a lower cost than we thought we could.”

Adding rigs is the primary way to gauge whether or not it is economically profitable for energy companies to drill for and pump the oil  According to one analyst, the companies have been able to streamline their operations to the point their breakeven costs have dropped by about $20 a barrel.  That’s huge:

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.

And what does it mean overall?

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.

Drilling rigs and fracking require a quite specific technical workforce, and there were a lot of layoffs as a result of the drop in activity.

We may find the supply of people becomes short very quickly if activity ramps up, leading to price increases again,” he predicted.

That’s right … jobs and less expensive gas.  Of course, most if not all of the shale oil drilling has taken place on non-federal land, and the market has been able to function without a great deal of governmental interference.  It is providing both employment and a very important commodity at less expensive prices.  Additionally, as it lowers its breakeven point, it buffers us against volume drops as the price of oil comes lower and other sources stop producing oil.  With the lower breakeven point, they’ll continue to pump past the point where they’d have quit previously because doing so is still profitable for them.  That helps ensure lower prices at the pump will be more common and more stable.

The market … a wonder we need to allow to work without interference much more often than we do.


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5 Responses to The power of the market, proven again …

  • Yeeeeup. At risk of sounding clinched…

    markets innovate, use resources most effeciently, and improve the standard of living for ALL.


    Let the markets work their “magic”. Plus, learn why it isn’t “magic” at all, but pure, elegant cause >>> effect.

  • So, the attempt to drive them out of the market has made them more cost-effective? The Law of Unintended Consequences strikes again.

  • Well gentlemen! This calls for a regressive tax on gasoline! After all that money people used to spend on gas they can afford now to spend on taxes!
    The government has subsidized the American gasoline consumer long enough!

    (that’s snark, for those who are unaware of my major tendency)

  • I pendulum implies a full return. It has not been.

    Also what’s been laid out has ignored the desire for smaller less intrusive government. The Reagan Revolution had some of that at least in sentiment even if Tip wouldn’t allow it in practice to the last drop of his blood. Its wasn’t all ‘moral majority’ motivated. the MM crap was more from social conservatives pushing themselves inside the party while the media was more than ready to depict the opposition as religious zealots.

    Another smaller government backlash which is ignored is the Tea Party.

    there is no cosmic cycle, there is no balance, there is only the Democrats/The Left getting their way and overdoing it to the point that they can’t sell it to the public. Which causes the public to actually consider candidates for their merits instead of how cool a dude they are according to Big Media.