Oil Industry – Domestic Fracking Breakeven
Over the last year and a half, the price of oil has plummeted from over $100 per barrel to around $35 per barrel. This dramatic decline has taken a huge toll on industry profits. More than that, it endangers the entire US domestic industry of hydro fracture technology (fracking) to extract oil.
In order to understand the industry better, it is best to explore the break even point to see if they can survive. The break even point is the base price at which all of the operating costs are built into the cost of extracting one barrel of oil. That includes drilling, extraction, the water, air and other chemicals that are pumped into the ground to get the oil out, as well as the cost of the people needed to make that process happen.
According to well-respected sources, the break even cost for fracking in the US varies by different projects and fields. They range from about $40 a barrel to over $180 a barrel. The Eagle Ford shale in West Texas is the cheapest place to frack oil, where $40 and $50 per barrel is still possible. At these costs, the current oil price is too low.
Of course this number also comes with an exception. If a company can continue to roll-over its debt. It can actually survive for a long time, even at prices below the break even point. The continued cash from loans keep the operation going and revenue coming in. When the price recovers, profit returns and the company can pay-off outstanding costs and loans. It is hard to tell what the status is overall because most oil drilling companies are private and do not make their financial situation public.
Overall, the industry is in danger due to the extremely low price. The price of a barrel of oil is now below the break even point. However, the industry can still survive for a period of time before operations start to curtail.