As widely reported, the two main reasons why global crude prices are trading below $50 is OPEC’s refusal to tighten supply. It is widely understood that Saudi Arabia-dominated OPEC is keeping the cartel’s oil pumps working at full capacity to pummel North American shale oil and Canadian tar sands producers. On a certain level, this strategy has been working-new field permit applications and oil rig deployments are crashing while shale industry layoffs are spiking. However, the sub-$50 price of oil hasn’t had much effect on shale oil production since the number of barrels of shale oil actually increased on a daily basis. The other cause for the oil price crash is the soft global demand for petroleum thanks to a weakening global economy.
Given the causes of oil’s decline, why is it so difficult to gauge the bottom of oil prices? Much of this has to do with production costs. According to most estimates, shale oil will be unprofitable at around $50 per barrel. This means the production costs of shale oil will be higher than the price of oil at around $50 per barrel. If it only were this simple. First, not all shale oil fields have the same cost profiles. Shale fields that need more expensive extraction technologies are the first to become unprofitable. Extraction costs are lower at other fields.
It’s also a good idea to remember to factor in extraction technologies’ impact on total extraction costs. As oil services firms look to cut costs, a lot more energy and attention will be devoted to coming up with higher productivity processes and techniques. Industry observers shouldn’t be surprised to find out if total shale oil production increases further as the price of oil slips toward the $25 range. The combination of shale field diversity and extraction technology advances might keep oil analysts guessing at oil’s true bottom price for a long time.