David Blackmon Forbes Op/Ed: U.S. Shale Is Slowing Down Due To Factors Beyond Its Control

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The U.S. shale industry is slowing down, and a recovery during the rest of 2023 seems increasingly unlikely due to a variety of factors beyond anyone’s control.

From its’ January 14 peak, the Enverus Daily Count of active North American drilling rigs has now fallen by 20%. Baker HughesBHI -0.9% said Friday its own weekly rig count has dropped six straight weeks. One week could be a blip; two straight might be a coincidence; but six straight weeks is definitely a trend.

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What are those other factors? Let’s look at a few:

Saudi Arabia’s announced cut of 1 million barrels per day starting July 1 failed to shore up crude prices. For the week, the U.S. benchmark WTI price dropped by 6% in the wake of the announcement;

China’s economic recovery as it emerges from last year’s draconian COVID-19 lockdowns is stalling. Bloomberg reports that the slow pace of growth is now creating growing fears of deflation in the Chinese economy, lowering expectations for oil demand growth in the second half of the year;

Biden officials are suddenly moving to purchase oil at these low prices in an effort to re-fill the U.S. Strategic Petroleum Reserve, which the President chose to deplete to half its normal capacity to keep gasoline prices low in the run-up to the 2022 mid-term elections;

U.S. shale drillers continue to deal with the massive inflation of the past two years in costs for steel and other critical materials for their operations, along with continuing supply chain disruptions. The higher costs and delays have the impact of raising break-even prices for drilling new wells, which in turn is leading to a scaling-down of drilling budgets as marginal prospects become non-economic.

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Despite these bearish factors conspiring to imply a further slow-down in U.S. drilling during the 2nd half of the year, the U.S. Energy Information Administration (EIA) raised its domestic oil production forecast for 2023 from an average of 12.5 million barrels of oil per day (bopd) to 12.6 million bopd this week. Even with steadily-improving per-well recoveries, technology advances and efficiency gains, this forecast seems unlikely to be met as the number of active rigs continues to decline.

First, OPEC+ has now cut so deeply into its daily exports that several member countries, most notably Saudi Arabia and the United Arab Emirates, now have millions of barrels per day in spare capacity. The national oil companies in those countries would be able to respond far more rapidly to rising commodity prices than the hundreds of U.S. shale producers would be able to collectively do.

Second, the bureaucratic inertia inside the corporate shale producers makes the raising of drilling budgets in response to short-term price increases difficult to accomplish. In many companies, a request for a significant increase in capital allocated to drilling would require approval from the board of directors, and many executives are reluctant to seek such approval unless they feel certain rising prices are more of a long-term trend.

What it all means is that America’s shale business is slowing down for now. Whether this is a short-term blip or about to become a longer-term trend depends on factors that are beyond the control of company executives or anyone in the U.S. government.

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