It is evident from Saudi Arabia’s OPEC moves that its primary concern is protecting its market share of global oil production against America’s shale oil production. So far, it appears this gambit is working-at least at the stage of global media perception. The standard narrative is that since Saudi Arabia’s self-reported cost of getting oil out of the ground is less than $10 a barrel (some reports say it is lower than $5 a barrel), it only needs to hang on long enough until North American fracking runs aground due to fracking’s higher cost per barrel (estimates range from as high as $60 to lower than $20 per barrel). Indeed, a number of financial pundits are already predicting a shakeout in the US shale oil industry as more financially insecure and highly leveraged shale players might have to sell out or close down altogether. Analysts also point to certain shale fields where extraction costs more money.
Don’t count North American shale oil down and out just yet
While there’s a lot going for the Saudi Arabian strategy in the short-term, one only needs to think back as to how American energy companies got into shale oil in the first place. One needs to look at the technological innovations in extraction techniques. Since there is intense pressure currently on shale oil producers to stay in the black, it isn’t out of the realm of possibility for extraction technology to step up to the plate and reduce overall extraction costs. While labor prices are comparatively firm, there might be a lot of room to maneuver, in terms of cost-suppressing productivity boosts, in automation. Just as technical advancements made horizontal drilling possible, similar advancements can lead to leaner, more efficient operations that would reduce costs and keep the shale oil industry afloat despite $20 to $30 per barrel oil. Stay tuned!