Potential Shutdowns Of Fracking Wells Looms–But Not Caused By Low OPEC Prices

Some of the Texas and North Dakota fracking oil wells were thought to not be profitable at the low crude oil prices that Saudi Arabia had engineered. But most of them have weathered the storm.   Drilling has slowed down however. World wide, except for the Middle East, rig count is down.

The price of fracked crude at the U.S.’s main trading hub, the Cushing tank farm, hit a low in January at about $44.80 and for the week of March 2 it was up a bit to $49.59.   European and Asian marker price, Brent crude, hit its low in late January at $46.69 but has bounced back up to $60.75.

The inventory at Cushing, Ok is so high it could soon reach its operational limits where it could have to reduce its intake. This would result in shutdowns of oil wells. Last week the US inventory of crude oil was at an 80 year high.

Did you know that it is illegal to sell US crude outside of the United States? This situation need not be. Quoting the WSJ posting: “By the estimate last year of the American Petroleum Institute, if the archaic export ban were lifted, the additional export opportunity would allow another 500,000 barrels a day to be produced, worth 300,000 jobs directly and indirectly.”***

This situation is the result of a combination of laws enacted over the years — Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979. In 1973 the OPEC embargo of crude to the US and the 1979 run up of prices caused legislation that was designed to prevent the US oil producers from selling their crude on the world market where they might get higher prices. If these two laws are not revised, the WSJ predicted that a wave of bankruptcies and layoffs would result.

There is another law that needs to be repealed.   That is the 1920 Jones Act, which is a protectionist policy for the domestic shipping industry. This law says that between US ports the oil must be carried on U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. The WSJ says: “It costs $2 a barrel to ship Texas crude to Europe or Asia and $7 a barrel to ship it to Philadelphia”. Senator John McCain has submitted a bill to essentially repeal the Jones Act.

It was OPEC”s plan to shutdown our fracking industry by the lowering of their crude oil price.   That seems to have failed. But rather our fracking industry may be shut down by outdated US laws. What shame it will be if this administration and our legislators let that happen.

cbdakota

***The WSJ posting is behind a paywall, so you may not be able to directly link to it. The title of the posting is “How the Oil Export Ban Chokes the Fracking Boom” dated March 6, 2015.