Why does US oil production continue unabated?
Why does US oil production continue unabated?
Oil production ceases to be profitable below a certain price per barrel. We might therefore expect American production, which is essentially unconventional and therefore particularly expensive, to become unprofitable and come to a halt as the price per barrel falls. At any rate, that's what some oil-producing countries might want: to put an end to the shale revolution by ruining independent American producers, in order to mop up the oil surplus and bring prices back up at last.
Yet this has not yet happened. The price per barrel has been sharply and persistently low since 2014, but the level at which the revolution will stop remains so far untraceable.
Firstly, despite their heavy debt load, independent producers have shown surprising resilience. These are new players, medium-sized or even small companies, which seem to be perpetually finding productivity gains. What's more, this resilience could be bolstered by public support when the time comes: with 1.7 million jobs created, the shale revolution is too important for authorities, both local and federal, to let it die without doing anything. President Trump made this clear in April 2020.
Then there are reasons linked to the fundamentals of finance and the particularities of the sector.
Even if unprofitable, production generates cash. As we all know, a company can make losses: as long as it has cash, it's not bankrupt. As long as the barrel covers direct production costs, it's in a company's interest to produce. Revenues don't cover depreciation costs, but as long as cash flow is positive, it's better to keep producing. What's more, the banks that have lent to these companies prefer to negotiate partial repayments, rather than put their debtors into liquidation. In practice, they have already begun to provision part of their receivables.
Beyond these reminders of the fundamentals of finance, there are two other reasons, linked to the oil industry itself. Firstly, oil companies are highly varied: the oils sought, the types of fields exploited, the techniques used and the financing structures are all different. So there is no magic threshold. If the drop in oil prices kills the shale revolution, it will be gradual, with some players able to hold out longer than others.
Last but not least, shutting down an oil well is a complex and costly operation, which can cause irreversible damage. Production represents a state of controlled imbalance between the pressure at depth and that at the surface. Stopping production has an impact on the geological layers. The greatest risk is that of (salty) water infiltration, altering the characteristics of the hydrocarbons. When production resumes, it could be of inferior quality and/or in smaller quantities. When production has to be reduced, producers prefer to stop drilling campaigns, and production declines through depletion, not all at once.
Ultimately, US production has begun to fall, but it's a long process, the effects of which are not yet being felt downstream on storage infrastructures, which remain saturated. Especially when consumption is falling even faster than production. Now, planes are grounded and people confined to their homes are not taking their cars.
Difficult to stop production, impossible to store, American oil is beginning to resemble electricity, which has been experiencing punctually negative prices for several years (see here).
[Back to main article: Understanding the negative price of oil]
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-Why does US oil production continue unabated?