COVID-19 and the Profitability of U.S. Oil
Donald Trump had to be the most fossil-fuel friendly U.S. president of recent times. When he became president, Trump quickly reversed Obama’s energy policies; the Keystone Pipeline was approved, imports from the Middle East were cut, and the price at the pump came down. It was claimed that America had become “energy independent” and was again a “net exporter” of oil. In 2018, the U.S. oil business even surpassed the record petroleum production peak set in 1970.
Inasmuch as American petroleum production had been sliding downward since 1970, how did this come about? It came about because of “unconventional oil,” e.g. shale oil. But even before the COVID-19 pandemic and the installation of a new president hostile to fossil fuel, shale oil had hit a snag: financiers were losing patience with shale’s profit performance.
In November of 2019, two months before the outbreak of the pandemic in America, NPR ran “As Oil Prices Drop And Money Dries Up, Is The U.S. Shale Boom Going Bust?”
Today, shale accounts for about two-thirds of U.S. oil production and nearly all of the industry's growth, but many of the companies that made that growth possible are now struggling to stay afloat. […]
Without access to new cash, many producers are pulling back on exploration. The number of rigs drilling for new oil is at its lowest point in two years.
That's bad news for people like Ron Fountain, who works on a drilling rig in the Bakken shale of North Dakota. He thinks back to a few years ago, when the price of oil was more than $100 a barrel and companies were drilling with abandon.
In March of 2020, just after the coronavirus began feasting on elderly Americans, “Why This Oil Crash Is Different” ran at both the Center on Global Energy Policy and at Foreign Policy:
With the economic slowdown from the coronavirus outbreak projected to cause the first annual drop in oil demand since the global financial crisis in 2009, oil prices had already plunged 20 percent in the lead up to last week’s meeting of the so-called OPEC+ group, which includes both OPEC members and several other oil-producing countries, most notably Russia.
Russia had made clear its ambivalence about cutting supply, given concerns about whether cuts would be effective in supporting prices, and Russia’s reluctance to throw a lifeline to U.S. shale oil producers struggling under low prices and high debt. […]
Even before this weekend, shale oil production growth was already projected to slow sharply due to lower oil prices and much tighter capital constraints as investors grew skeptical of the sector due to its poor profitability.
In April of 2020, with bodies piling up in makeshift morgues, The Guardian ran “US shale industry expected to shrink sharply as oil price falls”:
US shale was expected to grow by 650,000 barrels a day this year before the coronavirus outbreak wiped out forecasts for global oil demand, triggering one of the steepest oil price declines on record. It is now forecast to shrink by 1.5m barrels a day compared to last year and that may accelerate even further.
Also in April of 2020, the Federal Reserve Bank of Dallas ran “How the Saudi Decision to Launch a Price War Is Reshaping the Global Oil Market”:
Saudi Arabia’s decision [to expand oil production] was a response to the dislocation in the global oil market caused by the outbreak of the coronavirus (COVID-19) against the backdrop of an already weak global economy. […]
The resulting drop in the oil price from about $35 to near $20 has further exacerbated the financial stress experienced by U.S. oil producers in Texas, Oklahoma and other oil-producing regions, which were already reeling from sharp reductions in fuel demand caused by the coronavirus.
In July of 2020, as the pandemic was raging throughout America, the Washington Post re-ran Bloomberg’s “Shale’s Bust Shows Basis of Boom: Debt, Debt and Debt”:
What was very visible this spring was the steep drop in the fall of oil, driven first by OPEC actions to increase supply and then by pandemic lockdowns that decimated demand. But a crackdown by creditors alarmed at the industry’s debt levels had begun last year. […]
The pandemic and OPEC’s moves, which were driven by Russia and Saudi Arabia’s market-share war, pushed prices down steeply in March, with some oil futures prices falling into negative territory for the first time. Even when oil is at $35 a barrel, almost a third of U.S. shale producers are technically insolvent, according to a recent study by Deloitte LLP.
In August of 2020, energy investor Kirk Coburn ran “The US Shale Industry: From Boom to Bust”:
For years, the US shale industry was on a boom fueled by junk bonds from Wall Street. The industry was waning in 2019. In 2020, shale oil giants faced the perfect storm -- COVID-19, failed OPEC+ talks, and relentless oil price wars came to a head. Then the US shale industry went from just barely hanging on […] to a definitive bust.
The bust has been a long time coming; COVID-19 just pushed the industry over the edge.
In October of 2020, Forbes ran “As Oil Bankruptcies Surge, Vulture Investors Start Their Long Feast”:
More Chapter 11s are coming, […] it will mean that management teams are finally accepting of the new reality of oil prices stuck at $40/bbl amid a continuing supply glut and pandemic-weakened demand. The world has changed, the debt-fueled fracking binge has come to an end. Many zombie oil companies cannot survive in their current form.
Alarming stuff, I’d say. But pandemic or no, shale oil is a more costly proposition than regular old conventional oil. Because of the complexity of its extraction (fracking), shale oil has a higher break-even price than does conventional oil. It’s been alleged that the Saudis and others have recently been able to pump (conventional) oil out of the ground for $10 a barrel.
In April of 2021, at Oilprice.com, we read that “Oil at $60 is undoubtedly a comfortable price level for U.S. shale.” And since oil has been trading above that price recently, maybe the U.S. oil business can round up new investors and creditors willing to take a chance that shale oil can turn a profit.
But for U.S. oil to be profitable, the federal government needs to get a whole helluva lot smarter. Biden should start by replacing his Energy Secretary with someone who knows something about energy. Jennifer Granholm is unfit for that job. America needs an Energy Secretary with a deep understanding of both fossil fuel and its alternatives. Biden should consider someone like chemical engineer Robert Rapier (a recent article of his).
But Uncle Joe probably won’t replace Granholm with someone who knows their stuff. And he probably won’t reinstitute the policies of his predecessor. You see, the puppet masters who control Joe don’t care about high energy prices. They’d rather ride COVID into the midterms, as vaccine and mask mandates are about all they got going for them.
Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.
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