Falling oil prices could hurt US producers, fracking industry
With the price of oil now below $56 a barrel, drivers are smiling at the gas pump. However, American oil producers and the states whose economies rely on them are bracing for tougher times ahead.
"If oil drops five dollars a barrel, that's about a $17 million loss to our general fund and $17 million to schools in Wyoming -- a total of about $35 million," Wyoming Gov. Matt Mead told Fox News. He said, depending on various factors, the oil industry makes up about 30 percent of the state's revenue.
The irony in the falling prices is that the success of U.S. producers using hydraulic fracturing and horizontal drilling technologies is partly responsible, along with slowing demand by struggling Asian and European markets. Now that success could come back to bite the so-called fracking industry and other drillers in America.
Mead acknowledged that in the short term, lower gas prices will benefit businesses and residents in his sparsely populated state, where distances between towns are often calculated in hours instead of minutes.
But, he pointed out, "If we see low prices continue for some time, we'll see rigs start to lay down. And it's not just the direct revenue. It's the hotels, restaurants and all that goes with that."
Not to mention jobs.
Plans for new drilling likely would be the first casualty of a sustained slump in prices, according to Kathleen Sgamma, spokeswoman for the Western Energy Alliance.
"There is a point at which the lower commodity price combined with the increased regulatory cost will put new wells out of business -- they just won't be drilled," she said.
Tom Petrie, chairman of Petrie Partners and author of "Following Oil," said he recently talked to a major producer who told him, "'Well the plan for all of next year's growth is gone, we're now looking at what we did this year and it's a question how much we cut back from that level.'"
Depending on how long oil prices remain this low, some existing wells may be shut down as well, Petrie said. "There's a study that was put out by a firm in Houston that says they expect as we go through this cycle in the coming year, for something like 500 rigs to be laid down or idled."
Which companies will be affected and when will vary greatly, Sgamma said. "That depends on the efficiency of the producer, where they're placed within an area. Even within the Bakken, there are more productive fields than others."
Sgamma believes another factor is whether a well is on private, state or federal land, "because the regulatory environment is such that it makes it more expensive to develop on those federal or tribal lands."
In the past, the Saudi Arabian-led Organization of the Petroleum Exporting Countries (OPEC) has cut production to keep prices high, something they are now refusing to do.
Sgamma and other analysts believe there is a reason for that. "OPEC is definitely trying to put the U.S. producer out of business," she said.
She said that's because the U.S. "has been so successful in increasing production, over 80 percent since 2008 [while] we've reduced imports below 30 percent."
"So it's not just what's going on in the Middle East," Mead said. "It's also the advanced technologies and innovations that have created this situation where you have more volume, which is generally a good news story."
Sgamma also said that putting OPEC "on their heels" is a "pretty nice place to be."
Petrie believes most U.S. producers will survive in the long term, though not without cutting back. "There are things you could do when oil was 90 or a 100 dollars a barrel that will be uneconomic at today's price without question," he said.
Mead points out that major oil producers in the Middle East like Saudi Arabia cannot allow prices to remain this low forever. "They have to have prices [at a] certain level themselves because so much of their revenue is committed to their citizens. Their unemployment rate is exponentially high."