Further Bloodletting in Store For the Shale Oil Industry
In 2014, shale oil emerged in America and Canada as an ideal substitute to foreign crude oil. By 2015, the reduced demand for shale oil greatly weakened OPEC. Unfortunately, the massive supply glut in the oil industry has kept energy prices low. While these low prices have diminished the influence of OPEC, companies in the shale oil industry have also suffered. While the traditional oil industries are weak, green energy firms may revitalize the energy sector.
Due to low prices, the costs of extracting shale oil are hardly offset by revenue. With low profits, there are few incentives for entrepreneurs to enter the shale oil industry. In the United States, only the largest firms that can sell in bulk can afford to extract oil from shale deposits. As a result of this, many shale oil firms trimmed their operations in 2015. In 2016, people can expect more bloodletting for the shale oil industry. The United States is not the only country to be affected by decreased oil prices; Venezuela is in turmoil, and other OPEC members are suffering from shrinking budgets.
People Should Expect Extreme Reductions in Shale Oil Production
Many economists believe that the shrinking shale oil industry will have massive consequences for the supply and demand of energy. International conflicts, low expectations for oil, and volatile prices have created widespread feelings of uncertainty among entrepreneurs and investors, so the bloodletting process may last for several years. With less investment, there will be fewer opportunities for shale oil producers to innovate. Over time, the shale oil industry will stagnate, and its profits will be transferred to a more productive industry.
Since the shale oil industry is expected to lag for many years, substitute industries will have opportunities to get ahead. The solar energy industry may be able to use investment funds that would have flowed to the shale oil industry. This will give companies like Tesla opportunities to seize the energy market. If a green energy source becomes more profitable than oil, the shale oil industry will not be able to recover from the current slowdown.
The Surviving Shale Oil Producers Will Contribute to the Industry’s Downfall
Since only the largest producers will be able to survive low energy prices, companies in shale-rich states like Ohio and Pennsylvania may collaborate to force small firms out of the domestic market. Acting as a cartel, these producers could restrict output to raise prices for consumers. Due to the large global supply glut of energy resources, this would likely result in a preference for foreign oil instead of domestic shale oil.
Large producers can also increase output to decrease prices. This would be an effective way to eliminate firms that require quick funds to pay for leases. This strategy of eliminating small producers is not a concern for consumers; it would simply result in lower prices for buyers. According to Wolf Street, small firms have already been forced to suffer losses to pay for their debts. An American shale oil cartel would certainly cause many firms to fail.
The failure of numerous firms can negatively impact banks and financial intermediaries that specialize in servicing shale oil companies. Due to companies defaulting on loans, banks will fail if they do not have the capital to sustain losses. This increases the risk of bank failures in areas with shale deposits. Due to a spillover effect, other industries that rely on those banks for funds will also be impacted.
Leaders in the Shale Oil Industry Aim to Reduce Production Until Prices Climb
Many professionals in the shale oil industry have stated that they plan to sell just enough oil to cover their costs until prices return to favorable levels. This strategy will not save the shale oil industry; lower profits in the shale oil industry will channel funds to substitutes like the solar energy industry. As jobs decrease in the shale oil industry, important human capital resources will also flow to other industries.
Unfortunately, there are no alternatives that will ensure the survival of the shale oil industry. Despite this fact, an industry leader from Crain’s Cleveland Business believes that the shale oil industry can survive even if firms perish. He believes that the industry may survive as long as shale oil deposits exist. This is not necessarily true; whale oil was replaced by kerosene, and kerosene was eventually replaced by oil. When a viable substitute becomes available, oil will also be replaced. This cycle of replacement is inevitable, and it cannot be stopped.
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