Report

Oil Prices Have Yet to Hit the Floor

Surging crude inventories in the United States send prices lower, threatening more pain for shale producers but a boost for the global economy.

TXRIG

Crude prices in the United States fell further on Wednesday to six-year lows after a government report showed that booming oil production just keeps going, filling up commercial inventories and storage tanks. That will only increase the pressure on U.S. oil producers that are already struggling to make money with cheaper crude, and it will likely bolster momentum for U.S. oil exports. But the good news is that the global economy stands to benefit from more robust growth and falling inflation thanks to a prolonged slump in oil prices.

The price of West Texas Intermediate, the benchmark U.S. grade of crude oil, slipped further on Wednesday, March 18, to just over $42 a barrel after the government report showed that oil inventories are at 80-year highs. The Energy Information Administration, an arm of the Energy Department, said crude stockpiles grew by 9.6 million barrels in the past week, more than analysts were expecting. That’s a clear sign that oil producers have yet to rein in output despite an oil-price drop of more than 50 percent since last summer. An industry estimate of bulging inventories released Tuesday already had oil traders sharpening their claws, and the government data simply added to the bearish momentum.

“U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years,” the Energy Information Administration said in its weekly note.

With nearly overflowing inventories, it looks as if oil will stay relatively cheap for a while, after an ephemeral rebound earlier this year. While that’s awful for folks in Midland, Texas, it’s a plus for the world as a whole. Gasoline prices everywhere are lower than they were last year, pumping extra cash into consumers’ pockets.

The World Bank just concluded that the oil-price collapse should boost global GDP growth by 0.7 to 0.8 percent in the medium term. For countries that import oil, lower bills should translate into more robust corporate activity, the World Bank said. And for the world’s poorest, oil’s price decline carries additional good news: A 45 percent drop should mean a 10 percent decline in the price of agricultural commodities, which means cheaper food for those hardest-pressed to buy it.

But that will be small consolation for the already reeling U.S. oil patch. To be profitable, producers that use hydraulic fracturing to pump tight oil need higher prices than traditional wells do. The industry has made huge progress in recent years at squeezing more oil out of each well and lowering costs, which has enabled it to survive the price collapse so far. But with U.S. oil prices per barrel seemingly headed for the $30 range, many of those so-called “tight oil” projects will be unprofitable. Even the leanest operations, such as those in Texas’s Eagle Ford shale field, will struggle with oil under $40. OPEC, at least, believes that this could lead to a slump in U.S. oil production later in the year.

The outlook for years down the road is getting a bit cloudier too. There is less appetite from the industry to dive into expensive, long-term projects such as deepwater drilling in the Gulf of Mexico. On Wednesday, the U.S. government concluded another lease sale of exploration blocks in the Gulf, but with less interest than in years past. Interior Secretary Sally Jewell acknowledged that lower oil prices are curbing enthusiasm for risky, long-term projects.

Those same headwinds also are buffeting Britain. The United Kingdom’s chancellor of the Exchequer, George Osborne, presented a budget that included fresh tax breaks for oil producers working in the North Sea, because lower oil prices have so hammered their prospects.

In the United States, the bulging oil inventories portend even more declines in oil prices because the country is running out of room to physically store oil. The tanks in Cushing, Oklahoma, the depot for West Texas oil, are at record levels and could run out of room as soon as next month.

But those surging inventories are also giving fresh ammunition to proponents of exporting crude oil, something that has been essentially illegal in the United States since the OPEC embargo of the early 1970s. A report this week from energy consultancy IHS said that lifting the crude export ban would spur job creation across the economy. State lawmakers in the oil patch, especially in North Dakota and Texas, are urging Washington to lift the ban. Oil executives pounced on Congress and Barack Obama’s administration this week to try to convince them to lift the ban.

But oil refiners, which benefit from both cheap oil and the prohibitions on shipping crude overseas, are fighting back. They argue that they can easily handle the flood of light U.S. crude and that there’s no reason to send the raw material overseas when it can be turned into a more valuable product by refining it first.

Photo credit: SPENCER PLATT/Getty

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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