How low will oil prices go?

It’s becoming a war of wills between the OPEC nations and the frackers. I’ve long told you in this column that the reason oil prices are so low is because OPEC is trying to put the hydraulic fracturing, or fracking, business out of business. This innovative way of getting at oil that was heretofore unattainable caused an oil boom in North Dakota like we hadn’t seen since the early days of the Texas oil rush. That boom is now slowing down, and that’s because oil is now trading for under $40 a barrel. In March of 2012, oil was trading at $125 a barrel.

The question is how long can OPEC hold out? Saudi Arabia, OPEC’s largest member, derives 77 percent of its revenue from oil. Those revenues are down 23 percent over last year. The Saudis have resorted to spending cuts and tax increases to make up the difference. The move only solidifies the theory that they’re trying to keep the oil prices artificially low. They could easily pull back on production and watch prices double in the next year but they won’t.

I reported to you some time back that a Saudi prince remarked that we’d never see $100-a-barrel oil again. The incurious media didn’t bother to ask why. The answer is now obvious. At $100 per barrel, fracking is feasible. The lower the price goes the greater likelihood there is of frackers going bust.

An article on the website Investopedia.com says the most expensive oil in the U.S. comes from older wells known as ‘stripper wells.’ These wells only produce a few barrels a day. They become unprofitable at around $40 a barrel. In other words, at the current oil price, these wells will soon be abandoned. Canadian tar sands oil, the primary reason for building the Keystone XL Pipeline, becomes unprofitable at about $30 per barrel.

Although fracking is expensive, it’s not as expensive as, say, the Canadian tar sands. The break-even point for fracking is believed to be around $25 per barrel. So, why is fracking slowing down with prices still hovering around $37 a barrel? The experts say that fracking exploration gets riskier below $60 a barrel. In other words, when oil drops below $60 it becomes less likely that oil companies will explore for new oil through fracking. Also, the more expensive wells have to be shut down.

The oil rig count in North Dakota has dropped from a high of 203 in 2013 to around 130 today. What that means is the oil business is still doing fairly well but the construction business is not. Houses in the boomtowns of North Dakota were being gobbled up as fast as they could be built. Now many sit empty.

Saudi Arabia, the main driver of OPEC, can afford to bide its time while the prices plunge nearer that magic number of $25 when fracking becomes unprofitable. Other OPEC nations cannot. Oil revenues have dropped in Venezuela and that socialist OPEC nation has seen numerous food riots. Angola has seen high inflation and a depreciating currency as a result of the dropping oil prices. While the Saudis are still flush with cash, these poorer OPEC nations are on the brink of collapse.

We’re far from collapsing here in the U.S., and most of us are loving the low gas prices. However, we are not in control of our own destiny. As soon as OPEC has killed off the frackers, the prices will rise once again. We need to take this opportunity to become energy independent once and for all. 

Phil Valentine is the host of the award-winning, nationally syndicated talk radio show, The Phil Valentine Show.