Crude oil prices are dropping. One CEO explains what that means for his company.
The price of oil is dropping, and that means we’re in a sort of Dickensian scenario: It’s the best of times for American consumers, who are enjoying lower prices at the gas pump and gaining a little spending money.
However, falling oil prices can signal the worst of times for the oil and gas industry. Lower oil prices translate to lower profit margins and if margins shrink too much, the next step is often shutting down wells. Fracking, which is currently producing most of our oil and gas, can be a very expensive proposition.
When big oil makes less profit, the belt gets tightened, and that can be bad for the industry all around.
Oil topped $100 per barrel this summer, and since then, it’s fallen to about $80 per barrel. That sounds like a huge drop — and two years ago that would have been really bad — but now the industry has a better grip on exploration and production costs. Most shale boom operations that use fracking are still operating efficiently.
We’re not making as much money as we were last summer, but most wells in the U.S. can still keep going at prices of $60 to $70 per barrel.
I don’t think the price of oil will fall into the danger zone, and I think most oilfield service companies will conduct business as usual — I’m still bullish on the U.S. shale boom.
However, falling oil prices do make me pause before making large equipment purchases. The equipment I buy for our operations can cost from $50,000 to $800,000, and delivery can take about six months. That means right now I’m trying to anticipate needs for May 2015 and make appropriate spending decisions. I admit these last two weeks — the worst for oil and gas prices in years — have made me a little gun-shy about huge purchases.
Other large oilfield service companies have come out with similar statements. Canary has even seen a small increase in business over the past couple of weeks. However, it’s important to acknowledge that if we start tightening our belts, contractors and smaller companies will be affected as the tightening trickles down. For example, if oilfield service CEOs get too gun shy about large purchases, equipment suppliers won’t get as many orders and contractors who work for them will definitely be affected.
Oil prices are a slippery game
In a couple of weeks, we might know more about the future of oil prices. Like most oil and gas executives, I’ll be eating my turkey with a side of Organization of the Petroleum Exporting Countries news on Nov. 27. That’s Thanksgiving here in the U.S., but it’s also the date of OPEC’s major meeting to discuss oil production quotas for each member country.
One likely topic at the OPEC meeting will be the U.S. shale boom — and the fact that many politicians would like to lift the ban on exporting crude oil. That’s not something OPEC wants us to do. Adding another oil exporting nation will lessen their power over the global market.
That’s why some sources think OPEC will let members overproduce, thus dropping worldwide oil prices even more. That might temporarily hurt them, but not as much as it could hurt the U.S.
For example, Saudi Arabia’s wells are very inexpensive to drill compared to ours, so they can still make a big profit. When oil prices drop to an uncomfortable level for U.S. oil companies, drilling might stop. If we’re forced to stop drilling for a while, we might not be so keen to export our reserves.
As the CEO of a large oilfield services company, I can assure you the current price of oil isn’t forcing me to make any big changes. But it does bother me that oil prices — which affect our industry and our nation’s economy — rest in the hands of a group that uses them for political manipulation. That’s why I’m in favor of repealing the crude oil export ban to help our economy and give us more control.
If you’d like to learn more about the crude oil export ban and why we should get rid of it, visit canaryusa.com/talkcrude.
About the author
Dan Eberhart is the CEO of Canary LLC, an oilfield service company based in Houston, Texas.