Price Declines in Oil and Gas: How Industry is Responding
By SBE Council at 12 August, 2016, 11:35 am
by Raymond J. Keating-
The price of oil (WTI) declined from a recent high of about $107 per barrel in June 2014 to $42 at the end of last month. Meanwhile, natural gas prices (Henry Hub natural gas spot price – dollars per million Btu) dropped from $6.55 in February 2014 to $2.85 late last month.
These price declines certainly have been hard on the industry. However, at the same time, the oil and natural gas industry has withstood these dramatic price declines far better than most thought possible.
Energy Industry Getting Through the Volatility
Consider, for example, in an August 9 Bloomberg report, it was noted, “The Energy Information Administration increased its domestic output forecast for 2017 to 8.31 million barrels a day from 8.2 million projected in July, according to its monthly Short-Term Energy Outlook released Tuesday… ‘Obviously, the respite from the super-low prices earlier this year has had an impact,’ said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. ‘This highlights how the industry has been able to get costs down. They are able to profit with a lower oil price than before.’”
Another Bloomberg story from a few days earlier served up an example of how process and technology improvements can improve efficiencies: “Amid the gloom and doom that’s set in all along America’s shale fields these past two years, there has been one small, but consistent, bright spot. Sand, it turns out, is a much greater tool in hydraulic fracking than drillers had understood it to be. Time and again, they’ve found that the more grit they pour into horizontal wells — seemingly regardless of how extreme the amounts have become — the more oil comes seeping out.”
The process is explained, “Sand is by no means new to the oil industry but it’s taken on an importance in fracking that it never had in traditional vertical-well drilling. Because shale rock is so dense, drillers rely on large quantities of both sand and water to tease the oil out. The water is blasted into the well at high pressure to create tens of thousands of tiny cracks in the rock. The sand then keeps the cracks open, elongates them and makes them more jagged. Increase the amount of sand, fracking outfits have found, and you increase the amount of fractures that stay open.” For good measure, it has been discovered that cheaper brown sand accomplishes the same thing as more expensive white sand.
And then there are the market developments on the natural gas front. A recent report on natural gas production in Pennsylvania is worth noting. The main point? Even though the number of natural gas wells fell in Pennsylvania in 2015, natural gas production increased to a record level.
The bottom line was highlighted by an EconomicCalendar.com analysis : “Several US exploration & production companies have recently raised their production guidance for the full year, as they have significantly lowered their cost structure to pump oil at lower prices. Along with innovative frackers technologies, discounted pricing from drillers and oilfield services companies are also lowering their breakeven point.”
Private Sector Adjusts, Innovates, Invests
No one should be surprised by these changes. In the right environment, entrepreneurs and businesses in the market have every incentive to invest in innovations and efficiencies in the pursuit of profit. In turn, consumers reap tremendous rewards. That has been the case for more than 150 years in the energy business.
Finally, it also must be noted that entrepreneurs and small businesses are in play in all aspects of the market process. They make up the vast majority of firms in the energy industry, and they benefit from the resulting decline in prices and the enhancement in energy reliability as consumers.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here