How Does The Oil Price Plunge Dampen The American Shale Energy Boom?

The price of crude oil continues to plunge and reached a five year low this week. In light of the bearish streak in oil prices, energy companies primarily invested in oil exploration, petroleum and other oil-dependent sectors are facing a fall in their stock prices and as such are facing prospective investment cutbacks. Most of these companies are also deeply integrated and involved in shale oil exploration. These companies have been a part of the shale energy or ‘fracking’ boom in America. The oil price crisis brings to mind the question whether this shale boom could cruelly expose these companies to an energy bubble about to burst.

Oil-price slumps usually lead to cuts in energy firms’ investments. Production eventually falls, helping prices to stabilize. For example, ConocoPhillips recently announced it would cut investment spending in 2015 by 20 percent, the biggest sign yet that major oil companies are contracting. The big integrated energy firms, such as Exxon Mobil and Shell feel the main impact of the slumps. Much of the burden of their planned-investment adjustment will fall on America’s shale industry. This industry has been a big swing factor in supply, with output rising from 0.5% of the global total in 2008 to 3.7% today. That has required hefty spending: shale accounted for at least 20% of global investment in oil production last year. Now this spending is being threatened by oil.

The main concern for the industry is not the economics of oil. The shale projects are profitable enough to be economically viable even if oil prices hypothetically fall to $50 a barrel. However, the concern is the poor expected investment that an oil slump will generate and that the equity and debt markets boosting the shale industry drying up in the near future. Total debt for listed American exploration and production firms has doubled since 2009 and makes up 17% of all America’s high-yield. If debt markets dry up and profits fall owing to cheaper oil, the funding gap could be up to $70 billion a year. Were firms to plug this by cutting their investment budgets, investment would drop by 50%. All this suggests looming investment cuts that within a year will slow growth in American shale production to a crawl and perhaps even lead to slight declines.

Karan Magu, Class of 2017