After Saudi Arabia slashed its oil price on Monday, triggering the largest drop in the commodity’s value since the First Gulf War in 1991, US president Donald Trump tweeted: “Good for the consumer, gasoline prices coming down!”
While everyday Americans might welcome even lower prices at the pumps, the country’s shale industry is set to suffer as a result of the flooded market.
The shale boom of recent years changed the US from a net importer into a net exporter of petroleum, as it became the largest oil producer in the world.
However, should oil prices continue to hover around $30 a barrel then US shale firms will be forced to reduce drilling activity by as much as two million barrels per day (bpd), according to some estimates.
Even before the price war triggered by the Covid-19 crisis the American shale industry was already struggling with a profitability problem. As shale wells are used up much quicker than more conventional operations, firms have to drill more sites in order to maintain a steady level of output.
Only those drillers with wells in the vast Permian Basin and the DJ Basin are thought to be able to generate profit with oil prices of around $30. These include Chevron, Exxon, Occidental Petroleum and Crownquest.
However, the other 100 or so US shale companies are expected to make a loss should they drill new wells. While shale drilling is recognised for its dynamism, quickly increasing and decreasing activity, the ongoing price war will bite.
With Russia’s government stating that it can withstand oil prices of $25-$30 for up to 10 years and Saudi Arabia unveiling plans to increase production by a further 1 million bpd, the war shows few signs of abating.
By early-afternoon trading, Brent and West Texas Intermediate crude oil futures had fallen by 3.12 and 3.17 per cent to stand at $36.06 and $33.27.