Crude oil has fallen from over $100 a barrel this summer to closing below $46 a barrel. Such a low closing price represents a low not seen in over five and a half years according to an article published by CNBC. There are many factors that have contributed to such a sharp decline in oil prices. First of all, basic supply and demand dictates that an oversupply of any given good leads to a decline in prices. United States shale production has contributed to this oversupply of oil. In recent years, hydraulic fracturing, which is more commonly known as fracking, has been a controversial topic. On one spectrum, fracking enables United States oil producers to produce oil using the nation’s own natural resources. The opposing side argues that fracking has negative implications for the environment including pollution of water and the ozone. Although there has been much controversy and political debate, fracking continues in America.
In a controversial decision made a couple months ago, the largest oil producing region OPEC announced that it would not be cutting oil production. In the past, whenever there was an oversupply of oil in the global economy, OPEC would step in and slash production to ensure price stability. However, this time OPEC stated that they would not intervene in an attempt to force higher cost producers out of the market. Many producers in Saudi Arabia can remain profitable with oil as low as $10 a barrel. Most fracking corporations can only remain profitable around $40-$50 a barrel. Surely, many of the higher cost producers are already feeling pressure and are scaling back production.
Canadian oil producers are marching to a different beat, especially in the oil-sands region. “On Monday, major producer Canadian Natural Resources Ltd. became the latest to underscore the resilience of oil-sands growth. The company said lower oil prices will force it to trim investment on new projects and curtail its growth forecast – but it still expects output to grow 7% over 2014 levels, and it vowed to keep spending on expanding output at its biggest oil-sands mine over the next two years (Dawson). The preceding quote was taken from a Wall Street Journal article outlining how Canadian producers are taking a long term approach even as oil dips below $50 a barrel. The article goes on to state that many of the projects in the oil-sands region have 30 year production cycles. Furthermore, most of the projects have large upfront costs that benefit from scale. Lastly, producers in the oil-sands region can remain profitable even if oil were to slide between $25-35 a barrel.
Parting thoughts: the move by many Canadian oil producers to continue investing in oil projects despite a shocking drop in prices may be alarming at first, but makes sense according to the numbers. There are higher cost methods of producing oil including fracking and deep shore drilling that will be cut prior to Canada’s relative low cost of production. If oil prices stay depressed for an extended period of time or slide even further, the lowest cost producers will be the winner’s and the companies with the high production costs will be forced out of business.