Why Americas Fracking Revolution Wont Be Hurt Much By Low Oil Prices
For U.S. consumers, there's plenty to like about plummeting oil prices. After all, the cost of gasoline and home heating oil is falling dramatically as well. Since June, the price of WTI crude has dropped from about 101 a barrel to a recent price of 65, or roughly a 35 decline. And the average price of a gallon of unleaded gasoline in the U.S. has plunged to 2.76 from 3.27 a year ago, according to AAA. But don't falling prices threaten America's fracking revolution? A lot is at stake. Since 2008, U.S oil production has risen from about 5 million barrels a day to more than 9 millionan 80 increase. As fracking boomed, the U.S. oil industry has helped the country become more energy independent and has created slews of high-paying jobsPresident Obama, in fact, once said fracking has the potential to create as many as 600,000 jobs. Conventional wisdom says the threat to fracking is real. "Tight" oil is the term the industry uses for petroleum produced through fracking because it comes from geological formations of low permeability, such as tight sandstone or shale. Tight oil has produced most of the growth in the global supply in recent years, and helped lead to the current glut. Experts have said that U.S. tight oil needs to sell at 85 or 90 a barrel to be profitable. With oil recently trading at 65, it looks like the industry is in peril. The experts are rightup to a point. That 90 figure applies only to less than 20 of all "tight" oil fields. Says Jim Burkhard, the head of oil market research at IHS, a highly-respected industry research firm "There's a spectrum of break-even costs. Wells can perform differently in the same field." A new study by IHS concludes that about 80 of the tight oil estimated to be pumped next year will still be profitable at between 50 and 69 a barrel. Producers, it turns out, have gotten more efficient in designing and operating their fracking wells. Burkhard points to two factors at play. One is an increase in productivity due to a new technology called "super fracking," where drillers pump a lot more sand into their wells when they fracture the oil shale. Productivity at some super-fracking wells has risen from 400 barrels a day to 600, lowering the break-even cost. The other factor is the oil service industries. Says Burkhard "They've built up capacity over the past years. If there's a decline in drilling due to low oil prices, we'll see excess oil-drilling capacity and that puts downward pressure on the cost of producing tight oil.", Lower oil prices, however, will slow the rate of growth of tight oil as energy companies grapple with market uncertainty and volatility. While today's 65 a barrel might seem low, remember that in early 1980s, new production from the North Sea, Alaska's North Slope, and Mexico drove prices down to 10 a barrel. And from the mid-1980s to September 2003, the inflation-adjusted price of a barrel of crude was less than 25. With oil prices dropping, IHS estimates the growth in U.S. tight oil production will slow next year to 700,000 barrels a day, down from million a day in 2014. That estimate is based on a 77 a barrel. If oil goes to 60 next year that 700,000 projection will be cut in half to 350,000. Even so, the U.S. will still be adding a significant amount of new oil to a global market where demand is weakening. That makes any price spike short of a blow-up in the Middle East or OPEC suddenly getting its act togetherunlikely. The fracking boom is maturing, but it's not likely to go away any time soon. This article originally appeared on Fortune.com