As the markets opened this week, crude oil prices began a slow rally, rising back to $55 per barrel for the first time in weeks. This was in spite the fact that a labor union strike threatened to squeeze off production over the last few days. (Or perhaps as a result of it?) This will come as good news for producers who have been holding off on new drilling while prices lagged below the profitability barrier. But in North Dakota, in four key production areas, the work continues and developers think they could ride out a downward price trend even further… within limits.
The crude oil price drop has yet to chase all producers out of North Dakota, and it likely won’t – as long as prices remain at or above a critical threshold, according to recently released analysis by the North Dakota Department of Mineral Resources House Appropriations Committee.
In doing their analysis, the department looked at several areas affected by wilting crude oil values, including well permits, rig counts, production projections and even breakeven pricing.
What the department concluded is that new drilling would not cease until prices fell to $30/barrel or less, far lower than prices in the mid- to upper $40s a barrel seen in recent days.
All of this was predictable and we’ve discussed it here before at length. The price per barrel for crude can fluctuate wildly, but the costs which energy producers incur in getting the oil out of the ground do not. Labor, hugely expensive equipment and support services tend to remain fairly static in pricing, so below a certain point it just won’t be profitable to start up a new well. These are short term effects, though, since the market is rather self-correcting. When production dips to a certain point, the laws of supply and demand move the other way and prices go back up. This causes temporary distress for workers who find themselves laid off for a while, and there’s consumer uncertainty to deal with, but the overall flow goes on.
So how does North Dakota survive if oil goes to the 30 dollar range? Smart drilling. They focus on the most high value pockets which can be accessed with the least investment. This too is a temporary situation, since you eventually run out of the ideal drilling real estate, but it can be enough to see them through the lean times until production becomes more profitable.
The takeaway from this is that we shouldn’t listen to the alarmists who are now bashing energy industry jobs as being “unstable” or whatever the theme of the week is. Increased American energy production is just as good of a thing as it ever was, and we need to keep up the drive to stay on top. If we don’t do it, somebody else will be more than happy to.