$20 Oil Cannot Last

When is too low really “too low”?
With predictions that oil may go to $20, there is a real question if the oil companies are suicidal or not. When the typical stripper well costs $20 – 30 a bbl. to simply pump, maintain, and operate, how long can you sell oil for less than you spend selling it? The short answer is that you can’t. You must shut the well in and turn off the pumps.
The danger of doing that is that these horizontal wells apparently have some problem restoring production if they are shut in for long. Many may require a workover operation to restore them to operating condition, if they are shut in for more than a few days. But companies cannot burn cash and should not throw good money after bad. They are better off to simply shut in a well. And that is going to be the function of U. S. producers. The Saudis cost of lifting is far below that of the average shale well or stripper well in the U. S. so they can go as low as $10 a barrel and still generate a positive cash flow.
The average stripper well is marginal and usually operated by smaller companies who specialize in stripper production. They are often mom and pop operations. Lifting costs vary but with electric bills that can be as high as $2,000 per month and “pumpers” managing the wells costing another $1,000, you quickly see that a 10 bbl. stripper wells (300 barrels/month) costs $10 merely to lift the old, and out of the production, the royalty owner is owed from 12.5% to 20% of the oil. Add to the costs, maintenance and parts, bookkeeping, transportation, and other costs and $20 a barrel is not going to yield a profit. And the solution to buying watermelons for $1 and selling them for $1 isn’t to go buy a bigger truck. The well has to be shut in. When low oil prices were the norm from 1994 to 2003, over 140,000 stripper wells were shut in, or plugged and abandoned. Failure to produce for one year means the wells will revert to the royalty owner and the state requires the wells to be properly plugged with cement. I will stick my neck out and say we won’t see oil hit $20 per barrel. But if the states do not step in and impose pro-rationing and slash production, then we will do serious, permanent harm to any notion of “energy independence” for the next generation. We certainly cannot expect congress to impose a sliding tariff on Saudi oil which would put an end to this nonsense overnight. Once the dust settles, the world producers will have adopted horizontal technology and in doing so, will be the low cost producer of the future, leaving the U. S. production to only be profitable when oil prices are at extreme high prices.