When oil began its slide into a bear market last year, many investors worried about the future of shale oil production in the United States.
Anxieties grew over the ever-tighter margins shale producers needed to operate, especially as news of job cuts and lower rig counts became mainstream headlines.
Surely shale drillers couldn’t sustain such a shock to the price of oil when for years they’d enjoyed prices over $100 per barrel and a flurry of bullish drilling activity.
After seven months of endless decline, oil is now slowly coming back, and shale producers have faired pretty well, all things considered.
Sure, investors have lost some substantial capital gains, but you should also remember that it could be worse… much, much worse.
Take Nigeria as an example…
The Market Kills an Economy
Before the shale boom began, the United States relied on Nigeria to provide a lot of oil for consumption — especially light oil that’s useful as fuel for cars and trucks.
At one point, the U.S. imported a third of Nigeria’s total 2 million barrels per day in exports, but with the boom in light, tight shale oil in North Dakota and Texas, Nigeria has now lost most of its export revenue.
As you can see, over the last six years, the United States virtually ended Gulf Coast imports of light crude and shrunk its medium-grade imports dramatically.
The reduced import of these blends adversely affected Nigerian export revenue, and when shippers there tried to find new buyers, they ran up against other OPEC producers that already controlled the territory.
In the first three months of this year, the U.S. only imported about 65,000 barrels per day of Nigerian crude. As a result, the country’s Bonny Light blend now trades at its lowest price in more than a decade.
Add to this the fact that Nigeria has nowhere to sell its oil…
About 10 million barrels of crude sit in tanker vessels and take many months to find buyers with demand so low.
Meanwhile, the country relies on exports to fund its government: Nigeria needs prices at $115 to $120 per barrel to balance the budget, and it certainly won’t be able to find that anytime soon.
At some point, the lack of crude buyers, depressed prices, and a glut of oil could tank Nigeria’s economy if no solutions are provided.
And it isn’t the only country in trouble, either.
Medium-Grade Crude Goes Next
While Nigeria feels the dire consequences of $120 break-even oil, other countries like Saudi Arabia have similar fears.
The chart I showed you earlier tells us that in addition to light blends, medium-grade crude imports to the U.S. are in decline.
Most of these imports come from three countries: Saudi Arabia, Iraq, and Kuwait.
Despite a slight spike in the early months of 2015, medium-grade crude imports are down overall, and all of a sudden, Saudi Arabia’s break-even price of $30 per barrel seems more tenuous by the day.
Especially when other oil exporters like Nigeria and Venezuela pine to take away customers in a desperate attempt to sell their own oil again.
This is why Saudi Arabia maintained its production output during the bear market — and again in June. The Kingdom wants to prevent a loss of its market share as other exporters try to replace their U.S. export numbers in other regions.
Of course, if the U.S. can raise production numbers — or at least keep them flat until prices return — all other exporters, including Saudi Arabia, will have to cut production and alter their budgets because there will simply be fewer buyers of crude.
The consequences of a contraction in the countries forced to curtail production and exports are difficult to predict, but they could be devastating and take many years to correct.
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A Boon to Domestic Economies
So I’ll reiterate that the anxieties of investors during the bear market were a little premature.
I mean, it wasn’t good for us, but it also could’ve been much worse. Not too many U.S. producers can say they have to wait months and months on end to find buyers for their crude.
In fact, because the U.S. still imports crude from abroad, domestic production hasn’t reached the point of export neutrality, and there is plenty of room for production growth.
Formations like the Eagle Ford have fared well during this period of low prices; the formation just lost 6,000 barrels per day of production in May. Again, not great, but it could’ve been worse.
North Dakota’s economy last year was ruled by oil and gas.
Mining, which contributed $9 billion towards the state’s gross domestic product, also lifted every other industry related to oil production. That includes transportation, manufacturing, and professional business services.
The energy boom spurred the state economy to grow by 8% from 2013 even though lower oil prices hurt production in the second half of last year.
North Dakota pales in comparison to Texas, though. The state has two of the biggest formations in the U.S., and tight oil production has workers flocking to its economy.
As prices recover, the drillers in Texas stand to recoup huge profits and huge gains on the open market.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
