Will US Oil Production Leadership Survive the Pandemic?

Falling demand, rising production threatens energy independence
March 30, 2020 Updated: March 31, 2020

Commentary

One of the victims of the CCP virus may be the U.S. oil industry.

With lockdowns across the globe spreading as quickly as the pandemic, oil prices have fallen to 17-year lows, dipping briefly down to $20 per barrel. Crude oil prices have bounced back up a bit, to between $21 and $26 per barrel, depending on the source. But that’s subject to change quickly.

However, with over a billion people sheltering in place around the world for at least the next several weeks, the market has cratered. Travel and transportation for all but the most critical materials and foods are at a near-standstill.

That’s led to the steep drop-off in demand.

Oil Prices to Stay Low?

In fact, demand for oil has fallen so sharply that some experts expect prices to continue to decline for the next several months. The oil industry may be witnessing the lowest quarter for prices ever. Prices may well stay low as well, due to the price war that Russia and Saudi Arabia are engaged in at the moment. Both producers are fighting for market share.

If that falling price trend continues, it’s not at all clear that the U.S. shale oil industry, known as “fracking,” will survive. The potential for fracking to go away as a cost-effective source of energy isn’t new; it’s been a possibility for years, as we mentioned last October. Still, it has played a major role in making the U.S. energy independent, accounting for 80 percent of U.S. oil and natural gas production. It’s also a key part of U.S. foreign policy.

Fracking Remains Expensive

That said, the shale oil extraction industry is capital-intensive and debt-laden. With plunging prices, production has already been cut in some areas. It may not be too long before layoffs come about and companies go bankrupt. The break-even price point for fracking varies, but some experts say a range of $45 to $55 per barrel is necessary for fracking companies to make a profit.

We’re nowhere near those prices at the moment. But the pressure will likely increase on oil companies to cut back on fracking for a few compelling reasons that go beyond price and profitability, as if that weren’t reason enough.

Fracking Is Controversial

The fracking process itself remains controversial. Fracking extracts oil from shale rock through a process in which high-pressure steam and other substances are forced into the shale rock deep underground. This high-pressure injection of liquid fractures the shale and releases both oil and natural gas that otherwise remain trapped within the rock.

That in itself is problematic. It’s more expensive to extract oil by fracking than it is to simply drill a hole in the ground and strike a massive underground ocean of crude oil. As more vast oil fields are discovered, such as the “Leviathan” field discovered by Israel in the eastern Mediterranean, the world’s oil supply will continue to increase, potentially keeping prices lower than before, when oil cartels controlled both supply and pricing. Going forward, fracking producers may find it impossible to compete on a production-cost basis.

There are environmental concerns with fracking as well. Engineers use underground water reserves, called aquifers, combined with toxic chemicals to fracture the shale and extract the oil. This process results in polluting the water table, putting local communities in a potential water-shortage situation.

There is also the issue of earthquakes in fracking zones. This is a controversial issue because—at least to some—it’s apparent that fracking causes earthquakes. Many of the areas in the fracking regions of the country have seen a mild increase in seismic activity, while others have seen a dramatic rise in temblors, where little or none was known of before.

This includes states in the middle and eastern portions of the United States such as Oklahoma, Tennessee, and Pennsylvania. The fracking-triggered earthquakes are believed to be caused by the fracking process itself, which is believed to disturb the existing stabilizing pressure balance of underground faults, resulting in movement of the faults.

Fracking’s ROI Is Risky

Additionally, according to some industry experts, a suitable return on investment in fracking is becoming more difficult to achieve as time goes on. That’s due to not only the cratering market prices, but also because much of the “easy” fracking fields in well-known places such as the Permian Basin have been exhausted.

This means that even more difficult shale oil sites will have to be put into play. But with fracking becoming even more capital intensive with diminishing returns and rising debt loads, finding investors won’t be as easy as it was. It may just be that the industry’s best days are behind it.

Even without the market price for oil crashing as it has, fracking’s days could be numbered. That’s due to an expected problem of where and how to store the surplus oil that’s being produced around the world.

A Drive to End US Oil Dominance?

But also, the continuing war of production between Saudi Arabia and Russia is leaving the world awash in a glut of oil. And it may well be that the main goal of the Saudi–Russian price war is to drive U.S. fracking out of business. That would be in both nations’ interests.

Nonetheless, this race to the bottom of oil prices combined with expanding sources and the pandemic-related cratering of demand is pushing prices through the floor. All of these factors may well reshape the world’s oil supply map once again if it drives U.S. producers out of the market.

On the other hand, over the past several months, the world has become much less stable, and much more unpredictable. Fracking may become considered a national security issue, much the way medical supplies and pharmaceuticals have become.

It doesn’t seem likely that the Trump administration will allow the United States to become dependent on the Saudis or the Russians for oil any time soon.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.