How The American Shale Boom Warped The Oil Production Cost Curve

Here’s what happened during the shale boom: it became cheap to boost oil production.

By way of illustration, let’s use $US80 on the y-axis of the chart below as the breakeven point of reference.

In 2009, production hits a breakeven price of $US80 a barrel at production levels of just 10,000 kbd.

By 2011, drilling techniques that broke even at $US80 a barrel netted you 20,000 kbd of production.

But by 2014, $US80 a barrel was the breakeven price for 25,000 kbd of production. So in just five years, the amount of oil that was produced with a breakeven price of $US80 a barrel more than tripled. And what’s more, over this period, oil prices lingered between $US90-$US100 a barrel.

Who wouldn’t want to keep drilling, and keep investing in shale oil production, at those levels?

Over the last six months, however, the price of oil has cratered, with both West Texas Intermediate crude and Brent crude prices below $US50 a barrel. And data from the EIA released Wednesday showed that oil inventories are currently at the highest level in at least 80 years.

And so now the oil market is oversupplied, and prices have collapsed, and this chart shows part of the reason why: it made sense at the time.

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