Over the past few years, the U.S. has seen a veritable renaissance in oil production. Sustained high oil prices since 2008 and radical improvements in drilling technology have allowed energy companies to unlock a previously inaccessible bounty of shale oil, trapped beneath rock formations several thousands of feet deep.
As a result of this so-called shale boom, U.S. crude oil production is currently at a multi-decade high, while total oil imports last year fell to their lowest level since 1997. Industries ranging from chemical manufacturing to oil refining have all benefited from the cheap domestic energy provided by shale oil and gas.
But the boom's impact isn't just confined to the nation's borders. In fact, it has far-reaching consequences for the entire global economy, energy security, and -- perhaps most importantly -- oil prices. Let's take a closer look at why some experts are arguing that the shale boom could lead to lower oil prices by the close of this decade.
Shale's impact on oil prices
According to the International Energy Agency's recently released five-year outlook, the staggering growth in U.S. crude oil output has practically removed the threat of global supply shortages, leading to a more balanced market -- a development few would have predicted just five years ago. This has one resounding implication: It drastically reduces the threat of a sustained spike in oil prices.
Indeed, PIMCO portfolio managers Greg Sharenow and Mihir Worah have even characterized the growth in U.S. shale oil production as "the major factor in rebalancing future expectations of supply and demand," even adding that it could have "the most significant impact on oil prices of any supply event in recent decades."
So just how severe will shale's impact on oil prices be? According to a recent report by PwC, the expected increase in shale oil production could reduce prices to as low as $80 in 2035, meaning that oil would be cheaper two decades from now than it is today -- a truly bewildering thought. Citigroup (NYSE: C) has offered an even more bearish outlook, forecasting that oil prices are "likely to hover within a range of $80-90/bbl" by as early as 2020.
Winner and losers
If these pessimistic projections are borne out over the next several years and oil prices do fall below $90 a barrel, the impact would be distributed extremely unevenly across the world.
For instance, large oil-importing countries would stand to benefit handsomely, since lower oil prices would help them reduce their oil import bills and improve their current account balances. PwC reckons India and Japan could see a boost to GDP of around 4%-7% by 2035 if their oil price forecast proves correct, while the U.S., the eurozone, China, and the U.K. could see gains of 2%-5% in economic output.
On the other hand, a sustained period of low oil prices would be bad news for large oil exporters, such as OPEC -- whose member countries' national budgets are dependent on oil prices around $100 a barrel -- and Russia. According to PwC, Russia and OPEC's Middle Eastern members could see their trade balances fall by between 4%-10% of GDP in the long run if they fail to exploit their own shale resources.
Lower oil prices will also obviously have negative implications for the companies that explore for and produce oil, including large integrated oil companies, as well as small and mid-sized exploration and production firms. For them, the price of oil is often the single most important consideration as they assess future capital spending.
Implications for energy companies
If the oil price falls below its marginal cost of production, drilling activity in costlier locations, such as Canada's oil sands and deepwater prospects offshore Brazil and Africa, could quickly become uneconomical. Mining projects in Alberta's oil sands, for instance, have breakeven costs in the $90-$100 per barrel range, according to consultancy Wood Mackenzie, leaving them especially vulnerable to lower prices.
Already, some Canadian operators have scaled back their investments because of sky-high operating costs and depressed prices for Canadian crude oil. For instance, Talisman Energy (NYSE: TAL), Canada's sixth largest independent oil producer, slashed its capital budget forecast for the year by 25%, while Canadian Natural Resources (NYSE: CNQ) said it will scale back its spending on thermal-sands production, a process that uses steam to separate bitumen from sand underground.
Other drilling locations, however, may be less vulnerable, depending on factors such as the economics of the formation, its depth, and the extent of field-level efficiencies. In North Dakota's Bakken shale, for instance, Statoil (NYSE: STO), the Norwegian oil major, reckons its breakeven production costs are around $60 per barrel.
Meanwhile, Continental Resources (NYSE: CLR), the leading producer in that play, says its total cost per barrel -- including production taxes, depreciation and depletion -- is a mere $35. Since the price of oil is extremely unlikely to fall below $60 for a sustained period of time, these companies should be fine. Other Bakken drillers, however, may be more vulnerable.
For instance, Kodiak Oil & Gas (NYSE: KOG), despite having made impressive progress on slashing production costs, still spends about $10 million to drill and complete a well, significantly higher than Whiting Petroleum (NYSE: WLL), whose well costs are in the $8-$8.5 million range, and Continental Resources, whose wells routinely come in under $8 million. Still, prices would have to fall well below $85 a barrel for Kodiak's Bakken wells to become unprofitable.
As you can see, the application of advanced drilling technologies in the U.S. has helped precipitate an oil and gas boom whose consequences are being felt the world over. But when you think about it, it's really quite ironic. The same companies that helped the shale revolution take off are now threatened by the consequences of their own creation. Let's see if the same resourcefulness that guided them before can also see them through a period of sustained low oil prices -- if it ever arrives.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Statoil and owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.