Is the U.S. shale oil industry in trouble? No, it is engaged in a high-stakes competition for market share. As oil flooded the market in 2014-15, prices dropped dramatically and producers began burning midnight oil to manage the downward economic pressures. While some overleveraged companies wont survive the economic challenge, in true Darwinian fashion, the fittest will prevail.
According to the U.S Energy Information Administrations (EIA) “Drilling Productivity Report,” it is estimated that by January 2016, daily production in the seven most prolific shale oil and gas areas in the U.S is expected to fall by 116,000 barrels of oil and 365 million cubic feet of gas. Those seven production areasranging from the Utica and Marcellus shale deposits in the Northeast and the Bakken, Niobrara, Haynesville, Permian, and Eagle Ford deposits in the middle of the countryaccounted for 92 percent of domestic oil production growth and all natural gas production during the years 2011-14.
The decline is directly attributable to a 2014 decision by the Organization of Petroleum-Exporting Countries (OPEC) to produce without regard to market supply. Consequently, a barrel of Benchmark Brent crude oil that brought $114 in June 2014 today brings under $40. OPEC members, particularly Saudi Arabia, can afford the lower price because they can pump oil for as little as $15 a barrel –a competitive advantage American producers cannot match
In December, OPEC doubled down on its strategy and oil prices hit a seven-year low. The lower price hits OPEC profits too, of course, but the greater harm is done to competing oil producers with higher production costs. Those companies can only stop producing and exploring. Many will fail altogether.