U.S. crude oil prices have plunged by 11 percent over the last two days to a low of $50 a barrel before settling at $52. The mainstream-media blames the fall in prices on the turmoil in China and Greece, but the real driver is the outbreak of discounting by U.S. oil-rig operators.
The resulting fall in the average U.S. “break-even” cost necessary to sustain domestic oil production is now around $32 per barrel. America’s new hyper-competitive cost structure has launched a second wave of an oil boom that threatens to bankrupt OPEC.
The 55 percent plunge in oil prices over the last year is the fourth-longest in the number of trading days for declines of 40 percent or more. But unlike the normal price movements of commodities based on changes in supply and demand, the current decline, which started exactly one year ago, was due to a predatory effort by the Saudi Arabia-dominated OPEC cartel to regain market share volume it has lost to the U.S. oil boom.
As Energy Information Administration (EIA) data reveal, hydraulic fracking allowed the US to reverse three decades of falling oil production to pass Saudi Arabia as the world’s largest producer of petroleum and other liquids by 2013.
The early 2014 all-in break-even price for domestic oil exploration and production was estimated at $65 per barrel, according to a study by Morgan Stanley. Adding on the 9 percent profit necessary to sustain the boom, it was estimated that a fall in the price of oil below $71 per barrel would severely shrink oil production in the U.S.
By continuously keeping the price oil above $70 a barrel since 2009, OPEC realized by June of 2014 that it was encouraging U.S. competition. The cartel assumed that if it pushed prices down to $50 a barrel for a while, the U.S. boom would quickly implode.
OPEC began its “bear raid” on the week of July 4, 2014. The active US drilling oil-rig count at the time had just hit a multi-decade high of 1873. By knocking the price down to under $60 a barrel over the next 12 months, OPEC was able to shrink the active U.S. oil-rig count down to 628 by late June 2015, the lowest since August 6, 2010.
But to OPEC’s shock, U.S. oil production, rather than falling from 8.6 million barrels a day (bpd), actually rose by April to 9.7 million bpd. OPEC’s exports of Middle East “light sweet crude” to U.S. refineries on the Gulf Coast decreased by 45%,
IHS CERA business analysts attribute the continued U.S. production momentum to the cost of oil production dropping by 32 percent in the U.S. as drilling and service vendors have slashed prices to stay busy.
The U.S. “fully burdened exploration and production “break-even” cost is now $51 per barrel, and falling fast. Furthermore, with hundreds of American oil companies having already paid the exploration lease acquisition costs to accumulate tens of thousands of drilling sites, the production-only break-even cost for positive cash-flow is about $29 a barrel. After tacking on a 9 percent profit, U.S. domestic oil companies are now incentivized to produce domestic oil any time the price is above $32 a barrel.
That explains why the U.S. active oil-rig count, after 29 straight weeks of decline, rose by 12 to 640 for the week of July 4, 2015, according to Baker Hughes Inc.
OPEC’s action has been a disaster. The cartel has managed to drive down the sustainable break-even cost for U.S. production, thus helping the domestic oil companies take even more market share from OPEC.
Since OPEC members essentially run 75 percent or more of their economies on oil revenues, the average cartel member needs the same “break-even” price of $106 per barrel that Saudi Arabia needs to balance their budgets. Kuwait is the lowest-cost OPEC producer at $54 a barrel, and Libya is the highest at $184 a barrel.
With every OPEC member now at a higher break-even cost than the U.S., it is OPEC members that are at risk of being bankrupted in the second wave of the U.S. oil boom.