The price of a barrel of light sweet crude oil has tumbled from over $US100 per barrel this summer to just around $US80 per barrel this week.
Analysts have attributed this to slowing demand due to the decelerating global economy and higher supply in large part due to the US shale energy boom.
However, the US shale basins are relatively expensive to tap. And when the price of oil falls below a certain breakeven level, fracking for oil in these unconventional plays becomes uneconomical.
“[O]n a reserve weighted basis, the average breakeven for unconventional plays in the US is $US76- 77/bbl, at an asset level,” Morgan Stanley’s Martijn Rats, Haythem Rashed and Sasikanth Chilukuru write. “At the corporate level, this breakeven is likely to be higher. This too suggests that if oil prices persist at current levels, this would likely lead to a slow down in spending. “
The analysts characterised the downside scenario of persistently low oil prices as the “capex cliff,” a scenario in which energy companies cut back sharply on spending. And that in turn could ripple through the economy.
Their report included this chart of the breakeven oil prices for the various US shale basins.