U.S. Oil Output Surges to Highest Since 1980s on Shale
Source: bloomberg
U.S. crude production climbed to the highest level in at least three decades last week as the shale boom moved the country closer to energy independence.
Output rose 0.4 percent to 8.97 million barrels a day, according to weekly Energy Information Administration estimates that began in January 1983. The EIA’s monthly data, which goes back to 1920 and is based on data collected by state and federal agencies, shows production at the highest since 1986.
“U.S. crude production continues to grow strongly,” Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said by phone.
The combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S., including the Bakken in North Dakota and the Eagle Ford in Texas. The surge in production has helped push oil prices down 16 percent this year to a two-year low on Oct. 27.
Read more: http://www.bloomberg.com/news/2014-10-29/u-s-crude-output-surges-to-highest-since-at-least-1983.html
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FBaggins
(26,731 posts)"There's a call for you on the courtesy phone."
Now we watch who blinks first (OPEC or shale oil producers) and learn who the swing producer will be in the coming years.
The big oil companies obviosly have their faults, but I sure would like to see the cartel taken out of the oil price driver's seat.
sorefeet
(1,241 posts)How to get rid of OPEC. First oil use is on the decline, we swamp the refineries with surplus oil (drill baby drill). And with the rescheduling of non-toxic cannabis to take the place of many toxic oil products AND wind and solar is booming. No need for OPEC oil. Or anything to do with the mid-east.
happyslug
(14,779 posts)H. King Hubbert made his prediction in the early 1950s as to US convention production would peak around 1970 and go into slow decline. US conventional oil production in the lower 48 states peaked in 1969 and then went into decline till around 2005 when the price of oil hit $80 a barrel. OPEC tried to keep the price of Oil around $20 a barrel in 2002-2003 but then gave up for they did not have the production capacity to produce excess oil to make an oil glut (In an oil glut you see a decline in the price of oil).
At $80 a barrel Shale Oil became profitable. This was known in the 1950s but no one in the 1950s was willing to even image oil prices higher then during the previous oil price highs of the US Civil War Period. $80 a barrel is the higher OIL HAS EVEN BEEN, not only in nominal dollar terms but also in CONSTANT DOLLARS TERMS.
Furthermore, this production peak is NOT expected to last much longer. 2017 is presently expected to be the peak year of oil production from Shale Oil, then shale oil production is expected to follow a quick decline in production (roughly equal to the recent increase in production). (The Energy Information Agency says decline in US oil production will return by 2019).
Some observers have question the 2017 peak date, saying it is relying on data that has since been shown to be unreliable. i.e. Eagle Ford oil has been known for decades, but no one wanted to drill it for the cost to drill exceeded what the going price of oil was for decades (It is estimated the lowest price oil can be produce from Eagle Ford is at $65 a barrel, at which point the oil wells are losing money as they pump oil).
http://en.wikipedia.org/wiki/Eagle_Ford_Formation
http://www.outsiderclub.com/report/the-coming-bust-of-the-us-shale-oil-gas-ponzi/1041
Bakkan Oil Field wells in the Dakotas have a 40% decline rate in the first year of production. Yes 40%, not the 4-5% decline you see in traditional wells. Now total Bakkan Oil production is UP in 2014 (as it has been in previous years), but that is the result of more wells coming into production as older wells oil production falls.
http://www.outsiderclub.com/report/the-coming-bust-of-the-us-shale-oil-gas-ponzi/1041
Worse NON-US World Wide oil production appears to have peaked in January 2012 and entered into a slow decline. The Recent jump in US Shale production has off set that drop, but the real question is for how long?
http://www.resilience.org/stories/2014-09-17/us-shale-oil-growth-covers-up-production-drop-in-rest-of-world
Now the reason for this is simple. Oil is turned to Natural Gas by the heat of the Earth if the oil flows to a spot more then 20,000 feet below the earth's surface. Please note it was possible to drill to 20,000 feet by 1938.
Now, Natural Gas can be found down to 100,000 feet below the surface of the earth. Thus it is much harder to estimate Natural Gas Reserves then Oil Reserves. Natural Gas will last decades after oil is gone and that complicates the calculation of peak oil for tied in with Natural Gas production are "Natural Gas Liquids" that to a degree can be used as oil, but with a lot of restrictions (and most non shale oil production increase as been in these Natural Gas Liquids).
http://www.eia.gov/todayinenergy/detail.cfm?id=5930
http://www.iea.org/publications/freepublications/publication/ngl2010_free.pdf
http://en.wikipedia.org/wiki/Natural-gas_processing
Even the Energy Information Agency (EIA) states US Oil production will decline after 2019:
http://www.eia.gov/forecasts/aeo/er/early_production.cfm
Just a comment that while it appears on the surface Hubbert was wrong, Shale oil appears to be only a temporary reversal of the overall downward decline.
******************************************
A separate factor is also hitting the US Shale oil production, the problem of a decline in the price of oil, below the cost to produce Shale Oil.
RU hints that the bottom may be $60 a barrel, but then only for a few years:
http://en.ria.ru/analysis/20141028/194718621/Who-and-What-is-Causing-the-Decline-in-Oil-Prices-and-Where-Will.html
http://seekingalpha.com/article/2560725-could-the-shale-oil-miracle-be-just-a-pipe-dream
The price of oil is expected to decline, more do to overproduction:
http://www.reuters.com/article/2014/10/27/oil-forecast-goldman-idUSL4N0SM08A20141027
One of the problems with shale oil, is the high up front costs and the rapid decline in production. This means a massive investment in the well head, that has to be paid back by production, even if the price has dropped below the cost of drilling and producing the well. The old rule of investment was to maximize profits OR if that is impossible, to minimize loss.
Cost of a Shale well head includes the following:
1. Investment in obtaining an investment lease AND the duty under that lease based on a set amount per month OR set amount for barrel.
2. Money borrowed to pay for the drilling of the well, that is contracted by the term of the lease to be paid back within a set number of days after the well is drilled.
The above two costs are HIGH and FIXED, i.e. if the well is NOT pumped for oil, the payments for the above be MUST still be made paid.
This forces many shale oil drillers to put wells into production even if they are losing money for the lost of money is less if they get SOMETHING for the oil being pump (and to use that money to pay the above fixed costs). Now, such investors do NOT buy new Shale Oil leases, till the price of oil goes back up, but that may take months (and it now looks like years) for that to happen. Thus you have massive production of oil, by people trying to minimize their loss, but that will end within a few years as many of these investors do NOT buy new shale oil wells.
Please note this separate from the expected drop in shale oil production that is expected to start in 2017 (if not earlier). This drop is do to over production to minimize financial loss, not drop in production do to a lack of places to actually drill. This tends to built on itself, more oil is produced to further reduce the loss in that well, this further reduces the price of oil, which makes the well even more unprofitable, but given the FIXED cost, i.e. cost of the lease any any loans, it is still better to pump oil and sell it, at a huge loss, rather then take an even larger loss by NOT producing the oil.
In many ways this later problem will solve itself, The price can, in theory, drop so much that people will start to buy oil and the demand for oil will increase and with that increase in demand the price of oil will go up. Thus we will have a rough few years as prices go up and down, as oil production goes up and down.
The problem is this situation is only temporary. The long term trend is for oil production decline, but that is not expected to hit till after 2017.
FBaggins
(26,731 posts)He didn't account for the impact of price or technology. Nor did he account for the impact of artificial prices driven by cartel-driven supply controls.
Furthermore, this production peak is NOT expected to last much longer. 2017 is presently expected to be the peak year of oil production from Shale Oil, then shale oil production is expected to follow a quick decline in production (roughly equal to the recent increase in production
That's really not true. People have been making similar predictions for years now (that the shale boom was about to peak and then rapidly decline)... and they've been making those predictions based on the same rationale you've recited (rapid declines, production propped up by additional drilling, the best spots were taken first, etc.)... but they have been way off.
It's far more likely that total production will fluctuate based on prices as shale oil becomes the swing producer that stabilizes prices. We may find out where that stabilization point is in the coming months, but don't confuse that as a long-expected production decline because the geology just can't keep up. If oil looked like it would stay at $100/bbl... production would keep increasing well beyond three years from now.
David Hughes, a geoscientist with nearly 4 decades of experience studying the resources in Canada, including 32 years at the Geological Survey of Canada, recently wrote a report titled "The Shale Revolution: Myth and Realities." Hughes forecasts that production from the Bakken and Eagle Ford will peak in approximately 2016. This is only a few years away.
Yep... and he's also one of the people who had been badly off on his predictions in this area to date. Here's a post I made a month or two ago that goes over his prior predictions.
Worse NON-US World Wide oil production appears to have peaked in January 2012 and entered into a slow decline. The Recent jump in US Shale production has off set that drop, but the real question is for how long?
That's the same error that Hubbert was making. It treats oil production as always being at or near the maximum that can be produced at that time. Why is production falling? Peakists believe it can only be because they can't produce more. The reality is that if global demand isn't increasing (for whatever reason... but in this case due to economic weakness) as fast as production capacity is growing, someone needs to curtail their production or prices will decline.
Even the Energy Information Agency (EIA) states US Oil production will decline after 2019
"Even" the EIA, eh? That sounds like some of the posters that act as though the EIA is always overly optimistic and usually wrong. The reality is that their predictions over the last few years have needed correcting in the other direction (sometimes dramatically) multiple times. Just take a look at three years of their gas predictions on the thread I referenced. The model you're looking at is merely the "reference case". Boost the predicted price of oil (which would happen if production had trouble keeping up with economic growth)... and their peak extends out several years. In one case it's almost to 2040.
Just a comment that while it appears on the surface Hubbert was wrong, Shale oil appears to be only a temporary reversal of the overall downward decline.
Which just goes to show that the lessons from Hubbert's failure are harder to learn than people may think. If shale production declines and the rest of the world is well into a decline what happens? Prices skyrocket. If the current shale resources are attractive at $80/bbl... know that there are other resources that aren't attractive until $100... or $130... or $200. There are resources that are far larger than the shale plays that we're talking about now.
No... we'll cook ourselves before a hubbertesque collapse shows up.
happyslug
(14,779 posts)Last edited Thu Oct 30, 2014, 01:21 PM - Edit history (2)
My point was oil is a finite source. The exact amount is unknown, but we have a rough to guess at to the amount.
In the US, Shale oil was known as early as the 1930s, just ignored for the cost to produce such oil exceeded the then price of oil. This is true of both Bakkan and Eagle Ford, both fields have been known for decades. This is NOT "Newly found" oil that the high price of oil produced, but old oil that the high price of oil finally made profitable.
Hubbert understood this concept, thus his prediction for PEAK PRODUCTION was in 1970, and that production will decline afterward, including any new production from new fields (and it appears Hubbert did count on Eagle Ford and Bakkan coming into production as total US oil production goes into decline). Hubber pointed out it would take 110 years to go from Zero to Peak and another 110 years to back to Zero, thus Hubbert expected Oil production in the US til 2080, 110 year after lower 48 peak.
Hubbert accepted that production does tend to go up and down, but he was looking at TRENDS not year to year production. Thus Hubbert's prediction was that US oil production would peak around 1970 then decline, roughly as a mirror of the same rate of increased since 1859. Like the increase from 1859 to 1970, the decline will have periods of rapid decrease, some increases, including some large increases, and slow decreases, but over time these would average out as a steady decline. The larger the pool of oil fields, the more the pool will become more steady (i.e one or two fields, like Bakkan and Eagle Ford can show some huge increases, while overall the production rate would still be down).
Hubbert did not go into what would happen to much after 1970 but somewhere Admiral Rickover found out about a prediction for world wide oil production decline of around 2000 (Rickover made that point in a speed in the 1950s). Even today the data needed for accurate prediction of world wide oil production is missing, mostly because it is a state secret in OPEC Countries and Russia (which covers most oil exporters). Given this lack of data, any prediction of oil peaking outside of the US has problems, but educated guesses can be made, and actual estimates of US production can be made, given that Data for the US is fairly reliable.
The 2000 year for peak MAY have been true, except for the decrease in the Increase in oil usage and thus demand caused by the 1970 oil crisis. IF 2000 was the "True" peak year. then oil would have been pumped for 140 years by then, giving 2140 as the year the world would pump its last barrel of oil. If 2012 was the peak year, that is 151 years of production, then the last barrel would be pumped somewhere about 2162. Remember peak oil is the HALF WAY POINT OF OIL PRODUCTION, when the easiest and cheapest oil were pumped first.
Remember Hubber was geologist and was NOT concerned about the price of oil, but the amount of oil. He said US oil production would peak around 1970 (It did in 1969) and then go into decline (which it did). That is ALL HUBBERT was trying to do with his prediction. I suspect Rickover saw it as a threat to US security for the main reason the US and the USSR came out on top during WWII, was that even then both countries were the top two oil producers (and both have stayed in the top three ever since).
Sidenote: During WWII, the German Army has such a shortage of oil that it ordered all of its Infantry Divisions to use only 10% of the oil such divisions had used in peace time (Think about it, the peace time armies use a lot less fuel then an Army on the March, but the German Army "on the March" had to do with less). This was to save oil for the German Navy, Air Force and Tanks forces. A Story, unconfirmed, was no tanker out of Galveston Texas was sunk during WWII for many of those tankers were going to Neutral Spain, so Spain would transship the Oil to the Germans holding France. i.e. The German U-boats were ordered NOT to sink their own Oil. The Various German Gasification plants never came close to producing the oil German needed during WWII. The problem was NOT the Allied bombing (through they took credit) but such processes require a huge investment in TIME in addition to man power and money. That is true of every alternative to conventional oil, the price of such non-conventional oil is much higher then conventional oil and we have to learn to work around that high price, like the German Army did during WWII, by embracing the Bicycle (One battalion out of the 12 battalion in a German Infantry Division was a bicycle Battalion), the horse (the German used horses as their main means of transport after 1942) and the Mule (every German Infantry Squad of 12 men had one mule attached to it, in the US Army that was done by a truck).
The concerns about Peak Oil is simple, how will the subsequent INCREASE do to the world wide Oil Production Peak, in the price of oil affect the rest of society? Can the US economy survive with Gasoline at $10 a Gallon? I pointed out that in other countries as the price of oil, on a per US gallon basis, came close to that countries effective minimum wage, you had massive economic problems kicking in.
Thus the main concern when it comes to Peak Oil, is at what price does it lead to economic instability? When does the price of oil gets so high that people can no longer drive to work (which is the norm in the US)? That is the concern, that you can buy oil at $10 a gallon or $20 a gallon is unimportant, if the people who need that oil can NOT afford that oil at at that price.
A slow increase in price can lead to slow readjustments in society (i.e. return to the inner city and away from the suburbs for example), but most employers can not just shut down they suburban stores and open on in the inner city overnight. In the move from the Inner City to the Suburbs, the actual move took decades of cheap gasoline.
When I was young, I remember some of the then old but had been the first suburban stores of major inner city department stores. These had been opened up in the 1920s and 1930s along inner Urban Streetcar lines that were then becoming suburban lines OR at the end of Streetcar lines (by the time I was young, the Streetcars had been replaced by buses, but these older malls still existed). These first suburban stores were picked for two reasons, first to get people who had automobiles and place they could drive to and shop AND still have a mean for the hired help to get to the store by Streetcars or later buses. By the 1960s these were viewed as already obsolete for not only were shoppers going to such stores by Automobiles, so were many of the store clerks. This adoption of cars by people of the working class (generally purchased used) permitted suburban stores to open up away from any public transportation. There was some slow down in this movement in the 1970s do to the oil crisis of the 1970s, but it resumed in the 1980s and continued till about 2008 when the price of gasoline exceeded $4 a gallon in parts of the US.
The price of oil has declined since 2008 and is expected to decline further for at least two more years. This is do to the massive increase in Shale oil production driven by the high price of oil in 2008. On the other hand, driving in the US has DECLINED since 2008, an effect of the high price of gasoline, The real issue is at what point does the high price of oil does harm to the economy as a whole.
When minimum wage was at $5.25 an hour I did some calculation involving someone who works in suburbia at minimum wage and living in Public Housing. In such housing, 30% of income MUST go to rent and Utilities. Social Security Taxes equal 7%, local Taxes is generally 2% and in my home State of Pennsylvania Income tax is over 2% (and NOT graduated, thus even the poor pays the 2% rate). Thus 11% of all income goes to taxes. With rent, that means 41% of all income is a fixed cost. People do eat, at the low end it runs $2 for breakfast, $3 for lunch, $5 for dinner, or roughly $10 a day or $300 a month or $3600 a year.
Today's minimum wage is $7.15 per hour. Given there are 2080 hours in a 52 week, 40 hours a week job. At $7.15 per hour, that comes to $14,872. After taxes AND Rent that came to $8774.48. After food ($3600) that comes to $5174.48.
Now the average car in the US gets 20 mpg, most people of low income tend to buy mid size cars for the larger engines in such cars tend to last longer then the smaller engines in smaller cars (and most used small cars in the US are shipped overseas, people in Southern Europe and the East Indies pay more for such cars do to higher price of gasoline in both places). The average driver does 12,000 miles. Thus such driver will use 600 gallon of gasoline in a year. At $10 a gallon, that comes to $6000 dollars out of a budget of only $5174.48. At $5 a gallon it is only $3000, but that leaves only $2174.48 for everything else such worker needs, including phone service (which most employers expect employees to have), maintaining the Automobile to go to and from work, insurance on such a vehicle (and other costs involved with owning a car, including having the driver's license and the car licensed) and lets don't forget clothing. All of these costs have to come out of $2174.48 and remember that is the amount for the ENTIRE YEAR.
If the price of oil reaches today minimum wage of just over $7 a gallon, that comes to $4200 (at $7 a gallon), leaving just $974.48 for all those other items I mentioned above (At $7.15 per gallon that equals $4290, thus leaving $884.48 and remember that is for the WHOLE YEAR).
Now, in suburban stores, the retail clerks often get paid better then minimum wage, but NOT the maintenance crews, such janitors get only minimum wage, and today are often NOT full time (such people often work two or three jobs and drive between those jobs, increasing their milage and thus gasoline consumption).
Thus the concern over Peak Oil, no one is saying we will run out of oil when Peak hits, that is NOT the theory and never has been, The problem is as production of oil goes down and demand does not, price will go up. Today's economy is built on cheap oil, if cheap oil no longer exists (for it was replaced by $10 a gallon gasoline) we will have to go through some fairly rapid and rough economic adjustments.
How do you propose getting night time janitors to suburban stores that have no public transportation? Prior to WWII, most people walked to work, Public Transportation was the reserve of the upper middle class (who were the first to abandon it starting in the 1920s for the Automobile). Given a choice between taking a Streetcar (or a Bus) and walking, most lower people in the lower economic groups (the bottom 50%) walked to work.
Since WWII, the US has embraced suburban stores and suburban living, both of which assumes the people going to those stores, to shop or work, or living in those suburbs own and operate a car. As I show above, low income groups can NOT afford to live or work in suburbia if the price of oil goes to much above $5 a gallon. That is the main concern about Peak Oil, not that we may NOT have access to oil, but that the price of access will be so high we will see massive unemployment and riots in the streets.
Thus the problem with peak oil is exacting what you point out is the solution to Peak Oil, price. Can the US afford $10 a gallon gasoline? I do not think so. The US may be able to adjust to such high prices given something close to the 50 years it took to adjust from the Pre WWII era where most people walked to work to today's era where only 2% of the population walk to work. The problem is when Peak hits, it will hit like the 1969 US Peak, we will be in it before we accept that we are in it. That is what happened in the 1970s. During the Arab Oil Embargo of 1956 and 1967 the US was still a net oil exporter and in both cases the Embargos had little effect on the US, for the US increase its exports of oil during both Embargo. Come the 1973 Embargo the US was caught flat footed, the US was then a net oil importer and we were hit hard by that Embargo, much worse then Europe which had had to endure the earlier Arab Oil Embargoes.
The same with world wide peak oil, it will hit the US hard for the US is still the most oil dependent developed country in the world. Adjustments will be rough and opposed by people comfortable with life as it is at present (i.e. like the 1970s). People will want to hear how we are trying to return to the way it was in the 1990s (just like in the 1970s people wanted to hear how we were trying to return to the 1960s in terms of oil prices). The problem is this time around the oil spike will be permanent for it will NOT be the product of a group of nations rigging the system (OPEC after the 1973 oil Embargo) but the result of a steady decline in world wide oil production (and what production increase that will occur will be for oil that requires a high price just to be produced).
In simple terms, the US barely could support $80 a barrel (Cost without refining and shipping costs AND Taxes, $1.90 a gallon), the US was hurting at $100 (Cost without refining and shipping costs AND Taxes, $2.38 a gallon) but can the US $120 (Cost without refining and shipping costs AND Taxes, $2.86 a gallon and $200 a barrel (Cost without refining shipping costs AND Taxes, $4.76 a gallon) .
Price per....Price per Gallon.... Price per Gallon........Price per Gallon............Price per Gallon
Barrel............No Taxes........$.20 Shipping etc......with 18.4 Cent............. with State Tax
.......................................................................Federal Tax..............of 50 Cents a Gallon
$ 80................$1.90.................$2.10.....................$2.284........................$2.784
$100................$2,38.................$2.58.....................$2.864.........................$3.364
$120................$2.86.................$3.06.....................$3.244.........................$3.744
$200................$4.76.................$4.96.....................$5.184.........................$5.684
$260................$6.19.................$6.39.....................$6.574.........................$7.064
Just pointing out the problem with Peak Oil is NOT that we are running out of oil, but we are running out of CHEAP OIL. Once Shale oil goes into terminal decline (which looks like 2017 at the present time) then the price of oil will recover and start on an upward trend. How fast no one knows for the main brake will be how do minimum wage earners in the US handle the increase in the price of gasoline? There may be other groups in the US and overseas that may stop using oil before the Minimum wage earners in the US will be force to do so and if they do exist they will also acts as brakes on the increase (once such groups can NO longer afford to buy oil, demand for oil at that price drops and that acts as a brake on any price increase).
On the other hand I see the minimum wage earners who drive to Suburbia to do night time maintenance as the next large group of people who will have to quit going to work do to the price of oil being to high for them to drive to work AND THEY HAVE NO OTHER WAY TO GET TO GET TO WORK.
As the price of oil goes up even more, more and more people will fall into those sections that can no longer afford to drive to work. Many suburban stores complain today of a lack of workers (They want English speaking sales persons who are willing to work for minimum wage but often such people can NOT afford a car and thus restricted to public transportation, which is often limited in suburbia). If even more such people can NOT afford to drive to work, what is the solution? The options are limited, building low cost housing is generally NOT an option for suburban governments do NOT want such housing in their municipality. Providing public transit can only be done if they is a tax source to provide such service, and most areas refuse to pay taxes for such service. Moving to where public transit is available is a possibility, but a lot of stores do NOT want to move from where they are.
Thus Peak Oil and the high price for oil tied in with Peak Oil will cause problems. Problems that should take 50 years to solve, but may have to be made in five years (or even less). This is the problem of Peak Oil, that as the result of Peak Oil w will see a massive increase the prices of Oil. That massive increase in the price of oil will cause huge problems given that even the poor uses excessive levels of oil in the US and the rest of the Industrialized world.
arcane1
(38,613 posts)
Worse as in lower gas prices?
Or worse as in "the people who consume so much oil will no longr be able to offshore the environmental imacts of the drilling they're causing"?
To me... the combination could be a good thing. The environmental impact could cause us to push for lower demand... and the lower prices could simultaneously ease pressures on the economy and leave room to tax the oil while still leaving prices at reasonable levels.
arcane1
(38,613 posts)
Psephos
(8,032 posts)FBaggins
(26,731 posts)Inquiring minds want to know.
Psephos
(8,032 posts)
HoosierCowboy
(561 posts)...directional drilling. There may be more oil in the ground , but extracting requires more money than conventional oil. Thats where the consumer might end it by not be willing to pay more.
Enjoy it while it lasts.
Midnight Writer
(21,753 posts)Really? The demand for crude oil worldwide has dropped 30% in two months?
I wonder if the fact that ISIS (who I in no way support) is selling crude for 30 dollars a barrel is a factor.
happyslug
(14,779 posts)One of the main downward pressure has been shale oil and HOW it is financed. In a typical Shale Oil well, the driller gets a lease from the land owner (or who ever owns the mineral or oil rights of the property). One clause of such leases is that the owner of the land (or mineral rights) will be paid so much per month, even if NO oil is pumped. I refer to these payments as "Rent" below.
To pay for the well and the crew the Driller borrows money from a bank on the condition it will be paid back within so many months. Thus before the well is even drilled the driller has fix cost he must pay even if the well is a dry hole. I refer to these debts as "Debts" below.
When the price of oil was at its peak, people who held the right to drill demanded top money, and given the price of oil driller gladly agreed to such prices. The problem was the price of oil thens started to decline. I have read that Eagle Ford Wells to break even oil MUST be above $65 a gallon. Please note that is WITHOUT having to pay the rent and debt related to the cost of drilling the well.
Thus as long as the price of oil is above $65 a barrel, it is profitable to pump the oil from such wells. This is true even if the Rent and the loan to the bank has to come out of the difference between the price of oil and the $65 cost to produce. i.e. The cost of the rent and the debt are FIXED and must be paid even if that increases the cost to produce the oil to an amount in excess of what it can be sold for.
i.e. If the lease says Rent is 1 Million dollars a month, and the well can produce 100,000 barrels a month (or at about $10 a barrel), that fee has to be paid out of the oil being pumped, even if the price of oil is below $80 a barrel. Thus at 100,000 barrels that rent comes to $10 a barrel.
The same for the Debt. Such Debts often comes due on the day the well was expected to produce and it is expected that the 100,000 barrels of oil produced per month will pay for the debt due each month of $50,000. At $80 a barrel such a well can break even given these two fixed costs.
At $70, the $65 to produce remains, but you only have $5 a barrel ($500,000) to pay the fixed costs of Rent ($100,000) and Debt ($50,000). The Driller could shut down the well, but if the driller did so, the driller would still have to pay these total amounts of $150,000.
On the other hand, if the Driller sell the Oil at $70 a barrel, he has $100,000 to pay on these $150,000 of fixed costs. i.e his lost is only $50,000 NOT $150,000.
If you can NOT maximize Profits, you minimize loss, thus selling the oil at a loss, minimizes the loss of the driller. Thus the Driller has incentive to sell the oil, even if he is losing money on the sale. The slow downward push of oil prices since 2008 had lead to many a shale drilling operation into such a situation. The reason we have NOT seen more of it, is that such wells have short overall life spans (most are dry within five years). Many Drillers have attempted to minimize the loss even further by drilling more and more wells, but one of the characteristic of Shale Oil, is the first wells drill tend to be the most promising and thus the most profitable. Later wells are not as profitable and thus many drillers are in a race to avoid bankruptcy, but it is race they are losing.
As the driller are losing the race, the downward pressure on the price of oil increases as each driller sells more and more oil at a loss. Sooner or later such drillers end up bankrupt and this sell of oil slows down (no more new wells are driller). You will get to a point when the number of new wells drop so much that overall oil production drops, and with that drop the downward push on prices comes to an end.
Now, the US has increased oil production since 2008 mostly do to shale oil fields. These fields are considered very "Tight" i.e. small fields per well. Tus high costs to drill per barrel of oil produced. On top of this, most of the oil being found tend to be heavy sour oil, which requires a lot more refining then the sweet light oil of yesterday.
Given the nature of these "Tight" Shale Oil fields, the overall fields are expected to go into decline around 2017, if present trends of drilling continues (such drilling MAY be slowing down, but it is unclear this is do to the drop in oil prices OR that driller do NOT have faith in new wells given most of the better prospects have already been drilled).
Thus a comment that the pressure on prices right now is downward, a trend that started in 2012 and is continuing. It has more to do with Domestic US Production then anything anyone is doing.