It's Still Too Early For Tanking Oil Prices To Curb U.S. Drilling

Nov 4, 2014
Originally published on November 4, 2014 6:32 pm

Oil prices fell again Tuesday, to just below $76 a barrel before recovering slightly — one day after Saudi Arabia cut prices for the crude it sells in the U.S. market.

During most of the last quarter-century, that would have been viewed as a very positive development for the U.S. economy. But oil production here has increased so quickly in the past several years, the continuing price drops pose a potential threat to U.S. oil producers.

Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, says it's kind of amazing there's now a national conversation about whether a drop in oil prices might be harmful.

"That is not a conversation we would have been having five or 10 years ago, and it just demonstrates how dramatically the U.S. oil production outlook has changed," he says.

The rapid growth in oil production has made the U.S. the world's largest oil producer, largely due to the shale oil boom in North Dakota and Texas. The dramatic increase in drilling activity there has boosted U.S. job growth and the overall economy significantly.

The 25 percent drop in oil prices since June has spawned conspiracy theories that Saudi Arabia and OPEC are driving prices down to force U.S. shale producers to stop drilling. Last week, the OPEC secretary-general said that, with oil at around $80 a barrel, half of all U.S. shale projects would become uneconomic.

Bordoff disagrees. "I think that probably overstates the case," he says. "We may see some slowdown in the growth rate of U.S. oil production, but I think U.S. oil production will continue to grow."

Bordoff predicts that prices would have drop below $70 a barrel, and stay there for 6 months or more, to have a significant effect on U.S. production.

Daniel Katzenberg, senior energy analyst at Robert W. Baird & Co., also says he doesn't "expect to see really material slowdowns in activity yet." He thinks oil companies could begin to cut back on drilling if prices were to remain in the current range — around $75 a barrel — until January.

But even with some cutbacks, Katzenberg expects U.S. oil production would continue to grow — just a bit slower. "I don't believe that we are facing another bust at this point," he says.

Up in the booming oil fields of the Bakken formation in North Dakota, Niles Hushka runs an engineering and oil services firm. He says there's little concern about current prices curbing drilling.

"The reason that no one's reacting is that it's pretty normal," he says.

Since drilling began ramping up in the Bakken in 2007, oil has averaged about only $70 a barrel, Hushka says. And, he notes, the cost of production continues to go down. That's because the infrastructure to support the drilling and transporting of oil is now in place, and the technology of fracking oil shale continues to improve.

"I think that OPEC is sadly mistaken," he says. "I think ... in order to discourage production, especially in the Bakken, you're going to be looking at prices down in the $40 range."

And Hushka says there's still lots of room in the system to drive costs down. Several pipelines on the drawing boards, for instance, could reduce transportation expenses for Bakken crude by $7 a barrel, making production there even more competitive.

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Transcript

AUDIE CORNISH, HOST:

First, some good news - oil prices fell again today. And that's great for all of us who've been enjoying lower gas prices. The national average is below three dollars-a-gallon. But it's not good news for U.S. oil producers. They've become important players in the U.S. economy and in the global oil market. And for them falling oil prices are a threat. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: The average price for crude oil produced in the U.S. fell below $76-a-barrel today before recovering a bit. And yesterday, Saudi Arabia cut prices for the crude it sells in the U.S. market. During most of the last quarter-century, that would've been viewed as a very positive development for the U.S. economy. Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, says it's kind of amazing we're now having a conversation about whether a drop in oil prices might be harmful.

JASON BORDOFF: That is not a conversation we would've been having five or 10 years ago, and it just demonstrates how dramatically the U.S. oil production outlook has changed.

YDSTIE: The nation's oil production has increased so rapidly during the past several years that the U.S. is now the world's largest oil producer. That's mainly due to the shale oil boom in North Dakota and Texas. The dramatic increase in drilling activity there has boosted U.S. job growth and the overall economy significantly. The 25 percent drop in oil prices since June has spawned conspiracy theories that Saudi Arabia and OPEC are driving prices down to force U.S. shale producers to stop drilling. OPEC's secretary-general said last week that with oil at around $80-a-barrel, half of all U.S. shale projects would become uneconomic. Jason Bordoff disagrees.

BORDOFF: I think that probably overstates the case. We may see some slowdown in the growth rate of U.S. oil production, but I think U.S. production will continue to grow.

YDSTIE: Bordoff thinks prices would have to drop below $70-a-barrel and stay there for six months or more to have a significant effect on U.S. production.

DANIEL KATZENBERG: We don't expect to see, really, material slowdowns in activity yet.

YDSTIE: That's Daniel Katzenberg, senior energy analyst at R.W. Baird and Co. Katzenberg does think if prices remain in the current range, around $75-a-barrel until January, oil companies could begin to cut back on drilling. However, even with some cutbacks, he expects U.S. oil production would continue to grow just a little bit slower.

KATZENBERG: I don't believe that we are facing another bust at this point.

YDSTIE: Up in the booming oil fields of the Bakken formation in North Dakota, Niles Hushka says there's little concern about current prices curbing drilling.

NILES HUSHKA: The reason that no one's reacting is that it's pretty normal.

YDSTIE: Since drilling began ramping up in the Bakken in 2007, oil has averaged only about $70-a-barrel says Hushka. He runs an engineering and oil services firm based in North Dakota. And Hushka says that cost of production continues to go down. That's because the infrastructure to support the drilling and transporting of oil is now in place and the technology of fracking oil shale continues to improve.

HUSHKA: I think OPEC is sadly mistaken. I think that they, in order to discourage production, especially in the Bakken, you're going to be looking at prices down in the 40 range.

YDSTIE: And Hushka says there's still a lot of room in the system to drive costs down. For instance, several pipelines on the drawing boards could reduce transportation expenses for Bakken crude by $7-a-barrel, making production there even more competitive. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.