February 16, 2015


Oil Is Cratering. American Oil Production Isn't. : What gives? (Daniel Gross, 2/16/15, Slate)

What we're seeing, I'd argue, is an example of yet another type of American business exceptionalism. Compared with many of their peers in other countries, U.S. firms have often--not always, but often--demonstrated a superior capacity to adapt rapidly to changing circumstances. We saw it after the dot-com bust, as new tech industries arose amid the wreckage. And we saw it in 2009 and 2010, when companies large and small acted swiftly, often brutally, to ensure their survival, return to profitability, and help the economy come back (ahem) better, stronger, and faster.

Look hard enough, and you can see it in the oil patch, too. In recent decades, the oil industry--especially in the U.S.--has evolved from a brute-force industry into a nimbler high-tech manufacturing one. Fracking--a new drilling technology developed primarily in the U.S.--propelled the shale revolution. And technology-based companies don't respond to falling market prices by cutting production or shutting down. Rather, they innovate and experiment to bring down the cost of production and operations, push suppliers for lower prices, and hold down costs. If the market won't keep the market price above the break-even price, you can stop producing--or you can try to lower the break-even price.

The oil industry is more than 150 years old. But fracking is a remarkably young and still immature industry. And refinements are continuously being made to the fracking efforts that ignited the boom. Oil firms now drill wells more closely together, saving on time and supplies. In December, Fortune's Brian Dumaine described a "new technology called 'super fracking' in which drillers pump a lot more sand into their wells when they fracture the oil shale." The result: "Productivity at some super-fracking wells has risen from 400 barrels a day to 600, lowering the break-even cost."

Elsewhere, as Bloomberg's David Wethe reported this week, companies are taking a second bite of the apple. "Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn't exist when they were first drilled," Wethe wrote. Big iron and big steam are meeting big data. "New wells can cost as much as $8 million, while re-fracking costs about $2 million," Wethe noted, citing oil-services giant Halliburton.

Then there's old-fashioned cost-cutting. During a boom, everything costs more--overtime for workers, like the welder profiled by the Wall Street Journal who earns $140,000 per year, equipment like rigs that are in high demand, workforce housing in North Dakota. When tight markets start to give way to excess capacity, American companies tend to be quite nimble at seeking better terms, renegotiating contracts, and generally taking advantage of the altered dynamic.

Finally, there is the discipline corporate America is best at: holding labor costs down. Halliburton this week announced it would slash 6,400 jobs. In late January, as the New York Times reported oil giant BP froze wages for some 80,000 workers. Companies have become so serious about holding down costs, they're doing the unthinkable: cutting the salaries of top executives. The Houston Chronicle reported in January that Anthony Petrello, the chief executive officer of driller Nabors Industries, who is famous for his high compensation, cut his own salary by 10 percent.

Posted by at February 16, 2015 10:31 AM

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