Please ensure Javascript is enabled for purposes of website accessibility
Q&A: With Rock-Bottom Prices, Will the Oil Industry Recover?
gvw_ap_news
By Associated Press
Published 5 years ago on
April 29, 2020

Share

NEW YORK — With a barrel of crude oil costing less than a New York pizza, many U.S. shale producers are being pushed to the brink of bankruptcy and experts are wondering when, and if, the oil industry will recover.

The price of benchmark U.S. crude oil closed at $12.34 a barrel Tuesday. At the start of the year, the price was around $60.

The price of benchmark U.S. crude oil closed at $12.34 a barrel Tuesday. At the start of the year, the price was around $60.

Demand for oil has been decimated by the coronavirus pandemic, especially as shelter-in-place orders reverberated around the globe. “International travel, certainly by air, has essentially ceased, and that’s shocking,” said Jim Burkhard, vice president, IHS Markit.

The Energy Information Administration expects jet fuel use to fall 34% in the second quarter. In addition, the agency expects gasoline use to drop by 25% from April to June as drivers stay home instead of hitting the road during warmer weather.

Oil prices were declining even before the pandemic hit as producers flooded the market with more oil than the world could use. Now, as demand shrinks, the industry is running out of places to store it. As the downturn wears on, oil producers are dramatically curtailing their plans to drill for new oil and some have announced they’re shutting in wells that were already producing, a process that could damage oil fields.

Will the U.S. Oil Industry Recover?

No one can predict the future, but sustained low prices are likely to have a lasting impact on the U.S. oil industry. Prices are too low for most oil companies to drill new wells, and the amount of oil that existing wells generate declines over time. When oil companies stop drilling, that leads to long-term production declines.

IHS Markit suggests U.S. oil production could decline by 3 million barrels per day to 10 million by the end of this year, and could decline further to 9 million barrels per day in 2021.

U.S. oil production might not return to the same levels it enjoyed before the coronavirus hit, and 2019 may have been the peak of global oil consumption, Burkhard said.

“U.S. production is going to get hit hard,” Burkhard said. “Once you stop drilling, you have these very rapid decline rates that you don’t have anywhere else in the world.” Many producers in the U.S. are shale producers, and their wells cost more to operate than traditional oil drilling. Their wells also produce most of their oil in the first few years; after that, production drops off dramatically, so when drilling stops that leads to rapid declines.

How Much Has Production Declined?

In March, drilling for oil was down 25% compared to last year, according to oil field service company Baker Hughes. And things have only gotten worse since. March began with oil trading at around $43 a barrel and ended at $20. In April, oil prices dropped to a low of $6.50 a barrel and before bouncing back to the teens.

Oil companies have cut $80 billion from capital spending budgets this year, with about $36 billion of those cuts coming from the U.S., said Chris Midgley, global head of analytics at S&P Global Platts.

Who Will Be Hit the Hardest?

Major oil companies like Exxon with diversified businesses will survive, but smaller oil producers are going to have a harder time. “They just don’t have a lot of alternatives to stay in business once they stop production,” said Richard Marshall, head of global oil and gas industry practice at Nakisa.

Major oil companies like Exxon with diversified businesses will survive, but smaller oil producers are going to have a harder time.

Many producers, especially shale companies, took on a lot of debt to finance operations and can only make ends meet at about $40 a barrel. In the shale industry, about $20 billion in debt will come due in 2021 and $30 billion in 2022, Midgley said. The heavily-indebted companies are going to have to refinance in an environment where the availability of capital is constrained, he said.

The signs are already showing. Whiting Petroleum, a shale producer, filed for bankruptcy protection earlier this month, followed by Diamond Offshore Drilling. Parsley Energy, a mid-sized fracking company, lost half its market value since the year began and told regulators it has been shutting down enough wells to take about 400 barrels of oil per day off the market. Continental Resources, another shale oil producer, announced it would suspend its quarterly dividend.

Smaller producers will likely be bought by larger companies that are better equipped to weather the storm. “We will see more consolidation of the industry,” Midgley said. “We’ll probably see more bankruptcies.”

RELATED TOPICS:

DON'T MISS

What Are Fresno Real Estate Experts Predicting for 2025 and Beyond?

DON'T MISS

First California EV Mandates Hit Automakers This Year. Most Are Not Even Close

DON'T MISS

Hey PG&E Customers, Get Ready for New ‘Transaction Fees’

DON'T MISS

Fresno County Ending ‘Squaw Valley’ Fight After Latest Court Ruling

DON'T MISS

Exclusive: Tesla to Delay US Launch of Affordable EV, a Lower-Cost Model Y, Sources Say

DON'T MISS

Clovis Reconsiders Recycling Vote. Will a Campaign Contribution Matter?

DON'T MISS

Gov. Newsom Offers $50K Reward in 2022 Kings County Homicide

DON'T MISS

Trump’s White House Launches COVID Website That Criticizes WHO, Fauci and Biden

DON'T MISS

Fresno ‘Powers Up’ the Nation’s Largest Combined Solar and Battery Storage Project

DON'T MISS

Trump Admin Asserts COVID-19 Originated in Chinese Lab, Targets Fauci

DON'T MISS

Vendors Back at Fresno’s Art Hop? Survey Wants to Know What You Think

DON'T MISS

Russian Missile Attack Kills One, Wounds 112 in Ukraine’s Kharkiv, Officials Say

UP NEXT

Russian Missile Attack Kills One, Wounds 112 in Ukraine’s Kharkiv, Officials Say

UP NEXT

Iran Says Nuclear Deal Is Possible if Washington Is Realistic

UP NEXT

Israeli Strikes Kill at Least 25 in Gaza and Huckabee Makes First Appearance as US Ambassador

UP NEXT

Iran Wants Guarantees Trump Will Not Quit a New Nuclear Pact, Iranian Official Says

UP NEXT

Deadliest US Strike in Yemen Kills 74, Houthis Say

UP NEXT

2 Killed and 5 Hurt in Florida State University Shooting; Gunman in Custody

UP NEXT

Hamas Ready to Release All Remaining Hostages for End to Gaza War, Hamas’ Gaza Chief Says

UP NEXT

Supreme Court to Hear Arguments on Trump Plan to End Birthright Citizenship

UP NEXT

More Than 40% of Puerto Rico Customers Without Power After Island-Wide Blackout

UP NEXT

Popular AIs Head-to-Head: OpenAI Beats DeepSeek on Sentence-Level Reasoning

Clovis Reconsiders Recycling Vote. Will a Campaign Contribution Matter?

4 hours ago

Gov. Newsom Offers $50K Reward in 2022 Kings County Homicide

5 hours ago

Trump’s White House Launches COVID Website That Criticizes WHO, Fauci and Biden

5 hours ago

Fresno ‘Powers Up’ the Nation’s Largest Combined Solar and Battery Storage Project

6 hours ago

Trump Admin Asserts COVID-19 Originated in Chinese Lab, Targets Fauci

6 hours ago

Vendors Back at Fresno’s Art Hop? Survey Wants to Know What You Think

7 hours ago

Russian Missile Attack Kills One, Wounds 112 in Ukraine’s Kharkiv, Officials Say

7 hours ago

Iran Says Nuclear Deal Is Possible if Washington Is Realistic

7 hours ago

49ers Look to Strengthen Depleted Defense in NFL Draft

7 hours ago

Habit Burger & Grill Quietly Drops Impossible Burger From Menu

7 hours ago

Hey PG&E Customers, Get Ready for New ‘Transaction Fees’

Pacific Gas & Electric customers are already paying some of the nation’s highest rates for electricity, and their bills could be g...

3 hours ago

3 hours ago

Hey PG&E Customers, Get Ready for New ‘Transaction Fees’

4 hours ago

Fresno County Ending ‘Squaw Valley’ Fight After Latest Court Ruling

Tesla Inc. vehicle facility is pictured in Costa Mesa, California, U.S., November 1, 2023. (REUTERS/Mike Blake/File Photo)
4 hours ago

Exclusive: Tesla to Delay US Launch of Affordable EV, a Lower-Cost Model Y, Sources Say

4 hours ago

Clovis Reconsiders Recycling Vote. Will a Campaign Contribution Matter?

California Gov. Gavin Newsom speaks during a press conference in Los Angeles, Wednesday, Sept. 25, 2024. Newsom vetoed a landmark bill aimed at establishing first-in-the-nation safety measures for large artificial intelligence models Sunday, Sept. 29. (AP Photo/Eric Thayer, File)
5 hours ago

Gov. Newsom Offers $50K Reward in 2022 Kings County Homicide

The logo of the World Health Organization is seen at the WHO headquarters in Geneva, Switzerland, January 28, 2025. (REUTERS/Denis Balibouse/File Photo)
5 hours ago

Trump’s White House Launches COVID Website That Criticizes WHO, Fauci and Biden

6 hours ago

Fresno ‘Powers Up’ the Nation’s Largest Combined Solar and Battery Storage Project

6 hours ago

Trump Admin Asserts COVID-19 Originated in Chinese Lab, Targets Fauci

Help continue the work that gets you the news that matters most.

Search

Send this to a friend