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Would Regulated Oil Prices, Argentine-Style, Help U.S. Shale?

Pipeline Rigs

U.S. shale oil companies are filing for bankruptcy at an alarming rate, whereas, their counterparts in Argentina are having a gala time. When the U.S. shale oil drillers were struggling to earn $39 per barrel of oil, Argentina was offering $67.5 per barrel to their producers.

Due to the oil price crash, the world’s capital spending in oil and gas has reduced by approximately 20 percent in 2015. By comparison, U.S. oil and gas companies have reduced spending by 40 percent last year, according to Moody’s Investors Service.

On the other hand, Argentina’s state-run oil company YPF increased spending by only 4 percent during the same period.

Is this model of regulated oil prices in Argentina replicable in the U.S.?

Though this seems to be a good solution, this is not sustainable or beneficial in the long-term. Related: Wells Fargo Reduces 66% of Credit Lines to Oil and Gas Players

Prior to 2014, when oil prices were high, the cost of U.S. shale oil production was estimated to be between $70-$90/b, according to different analysts. But when crude prices declined, shale oil producers were forced to innovate and reduce costs, which has decreased the cost of production to $60/b in the third quarter of 2015.

As the oil prices continued to drop further, shale drillers continued to modernize, further reducing the cost of production in 2016.

Along with the technological advances, the productivity of the companies has also increased. They are utilizing their manpower wisely and funds prudently.

The world is recognizing the need for cleaner fuels and a preference to move away from fossil fuels. Hence, there are many experts who believe that oil prices are unlikely to touch $100/b again.

On the other hand, the biggest oil trading company, Vitol, has forecast a likely range of $40-$60/b for the next decade. Had the U.S. protected the shale oil producers, they would not have taken steps to cut costs.

The high prices paid to the oil companies in Argentina is borne by the consumers. Such a practice in the U.S. would have reduced the disposable income available to American households. Related: Why Cheap Shale Gas Will End Soon

“It may not have a huge effect on the top 10 percent of households, but if you’re earning $30,000 or $40,000 a year and drive to work, this is a big deal,” said Guy Berger, United States economist at RBS back in January 2015, when crude prices were close to the current prices of $49/b.

Now that the shale oil drillers have considerably reduced production costs, if crude oil prices rise even to $60-$70/b, they will reap windfall profits. Their longevity has increased, and they are here to stay.

As a result, following Argentina’s approach is not long-term positive for the industry. U.S. shale oil companies have drastically cut costs in order to survive, ensuring that they will be competitive over the long-term.

By Rakesh Upadhyay of Oilprice.com

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  • R. J. Spoley on May 26 2016 said:
    As usual, the analysis is lopsided in looking at the problem from only one perspective. Money handling. First, better than 33% of the "oil" from "shale wells" is greater than 50 API. Not good for making gasoline much less diesel. Secondly, "shale wells" only hold the zone they are completed in, thus no work overs or recompletions and no stacked reservoirs. What you see, is what you get, and in this case, it's very short term. By the way, you really don't get to "see" your reservoir as these wells are not logged "horizontally". Also, try pumping a " horizontal" well. Lots of luck. Once the gas energy source declines the show is over. Sorry. Reserves? Your kidding. Porosities of 5-8 % and 90% water saturation and recovering less than 20% of the "in place" reserves. The list goes on. This is all very short term thinking. Large vertically integrated oil companies usually require 10 years to "first oil" and it's getting worse with all the global unrest going on. The American E&P industry, along with OPEC has always been about regulating production because oil & gas are a commodity. Too much causes a price crash and producers go out of business which causes a shortage resulting in a price spike. All governments control commodities on both the up and down sides with production/price sideboards. This has stabilized agriculture worldwide. Now this guy wants to eliminate these controls and create chaos. Get a life! We wouldn't be in the fix we're in now if proration rules had been adhered to!
  • The Donald on May 26 2016 said:
    How much does it cost the American economy to protect Americans against terrorists? They are funded by oil sales to the USA. If we produced more oil at home the prices of OPEC oil would drop even more and they would have less money to do harm around the world. So yes we should protect our domestic producers from extreme swings in price that are caused by external forces such as Saudi Arabia flooding the market. Therefore, the author needs to either get a brain or use the education in a manner that will help the American economy. I thought Hillary was dumb but there are people even dumber.

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