In the past few days, we’ve gotten a glimpse of what U.S. energy independence looks like. It isn’t exactly what we thought.
For 40 years, the U.S. has been trying to free itself from dependence on foreign oil. We aren’t there yet, but rising U.S. production has pushed oil prices to a five-year low of $67.53 a barrel on the world market. Last week, OPEC had a chance to halt the decline, but Saudi Arabia, reasserting its dominance over the cartel, refused to cut production. As a result, crude prices continued to slide.
Cheaper fuel prices are a good thing for the global economy, but oil’s decline has been so fast and so unexpected that it’s caught many in the energy industry by surprise. Companies already are paring capital budgets and some are slowing plans for new drilling. That’s already hurting oil field service providers and offshore rig operators, who will bear the brunt of the decline. This month’s $35 billion offer by
Even as companies spend less on new drilling, though, domestic production is likely to keep rising. That’s because companies are unlikely to shut-in wells that are already producing or that they’ve already committed to drill. What’s more, some producers have hedged effectively against price declines or are focused on lower-cost areas such as the Eagle Ford Shale of South Texas, where the price decline has done little to slow drilling activity.
Will the rejuvenated U.S. Oil Patch fall victim to its own success? A prolonged weakness in crude prices, of course, could take a toll. Companies with too much debt or too many expensive drilling projects are likely to be in trouble. Look for more consolidation among smaller producer in particular. And financing may dry up if prices continue to decline.
But there also are some characteristics of the U.S. oil boom that may be an advantage in a volatile price environment. For example, wells drilled using hydraulic fracturing tend to have an initial surge of production that trails off more quickly than conventional wells. That short production cycle could result in shorter financing cycles, which would help companies avoid project costs that make the wells uneconomic as oil prices fluctuate.
In addition, fracking technology has only been in widespread use for about a decade. In that time, it already has been refined, making it more efficient and cost-effective. If those sorts of advances continue, it may help U.S. producers continue to drill at lower prices.
This wasn’t how energy independence was supposed to look. For decades, the U.S. has pursued alternatives to conventional energy sources as the means of breaking OPEC’s grip on our economy. Instead, we have found that the most effective tool in reducing foreign imports is also the most obvious: increased domestic production.
OPEC’s decision to keep pumping, though, is hardly a victory for the energy industry. While we have become one of the world’s biggest oil producers, we also have some of the highest production costs. The Saudi’s clearly see the lower price as a way to reclaim market share, not just from American shale drillers but also from Russia and other non-OPEC countries.
That leaves U.S. oil companies in a game of chicken with OPEC. Will OPEC members who need higher prices — Venezuela and Iran, for example — blink before domestic producers have to pull back their operations significantly? Some producers, such as Harold Hamm’s
As I’ve written before, energy independence was never going to be a clear-cut victory. Even if we achieve it, maintaining it will require a huge capital investment. What we’ve seen in the days since OPEC’s meeting is that just reducing our foreign oil imports by about 30 percent can create as much uncertainty as home as it does abroad.
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