For the last several years, states such as North Dakota, Texas and Pennsylvania have reaped the benefits of an oil (and gas) boom as companies used the controversial oil and natural gas drilling method—more commonly known as fracking—to push U.S. oil production to record levels.
That has been good news at the pump for consumers, but the plummeting oil prices that fracking helped produce are also problematic for the industry.
“Fracking is a very expensive way to get oil when compared to conventional drilling methods,” says NIU Professor of Finance Gerald Jensen. “When oil prices were around $100 a barrel it was a profitable proposition, but with prices now hovering around $45 a barrel, it is no longer as efficient.”
Fracking is expected to begin in southern Illinois this year.
Jensen saw the impact of that change in his own portfolio. A fracking stock he bought for about $18 a share in the spring of 2012 had nearly doubled in value by June of 2014. Currently the stock is trading at about $10.70.
“The number of new wells that fracking companies are drilling has dropped dramatically,” says Jensen. Indeed, one oil-industry analyst, PacWest Consulting Partners, recently revised its 2015 predictions for fracking production to reflect a 12 percent decrease, rather than the 6 percent increase they had previously expected.
That is exactly what the international oil cartel, OPEC, was hoping for. The cartel has kept its wells producing at high levels in an effort to suppress prices to levels that make fracking unattractive and hopefully drive those companies out of business.
Also contributing to the glut is Russia, which is also keeping its oil production high for the simple fact that it cannot afford not to. Oil and gas account for nearly 70 percent of that country’s export revenue and more than half of its budget depends upon energy revenues. The glut has been further exacerbated thanks to Iraqi oil fields that are now producing at levels not seen since the 1980s and Libyan oil fields are starting to come back on line after a year of civil unrest shut down operations there.
Furthermore suppressing prices is declining global demand for oil due to flagging economies in Europe, China, and now Russia.
Put it altogether and it would appear low oil prices will be around for a while. Does that mean that fracking business in Illinois had has gone bust before it could even boom? Probably not in the long term, says Jensen.
“Fracking is in its infancy, and the technology is likely to get more efficient over time so the breakeven point will move lower. Also, history tells us that oil prices will not stay low forever, so companies that can ride out this period of low prices should be all right,” he says “However, as always, it will be the larger, more established oil companies that will emerge in the best shape.”