At What Price Is Shale Oil Really Profitable?

When the price of oil first started to decline, we heard that shale oil companies needed to sell oil at $60 to continue to make a profit. Then, that number dropped to $50 a barrel. Every time the price of oil dropped further into uncharted territory, the price needed for shale oil producers to make a profit apparently dropped as well. Now, there are claims that shale oil is profitable at $30 a barrel.

The truth is that there is no specific price at which the U.S. shale industry is profitable. Whether or not a company can make a profit on a barrel of oil depends on a host of different variables such as its operating expenses, the severance tax charged by the state, the interest it must pay on its loans, ease of oil recovery, and the drilling and completion costs of its particular wells. When these (and other) factors are taken into account, only about 1% of shale oil in the Bakken area of North Dakota seems to be profitable at $30 a barrel.

This is not to diminish the extremely important technological advances that have occurred in the shale oil field since 2006. In just ten years many shale companies cut expenses and increased the amount of oil recovered such that their operations could be profitable at a price of $60 a barrel. Depending on the company and the ease of recovery, some operations are profitable at $40 or $30 a barrel. But just because the cost of recovering shale oil has declined steadily over the past ten years, it does not mean this trend will continue. In fact, there are some indications that easily recoverable shale oil is actually drying up. In that case the downward trend in the cost of drilling and operating a shale oil well will soon be reversed and we could see increasing rather than decreasing costs – despite recent technological advances.

Shale oil is not a monolithic force in the oil market. What pundits commonly refer to as “the shale oil industry” is really a multitude of companies making decisions based on what is best for themselves and their shareholders. Just because a few companies are profiting from oil they sell at $30 per barrel is no indication that “shale oil” as a whole will make a comeback as soon as oil prices climb back to the $40 or $50 a barrel mark.