Low Oil Prices Offer Uneven Economic Effect

Low prices impact state economies
Low prices impact state economies

As consumers enjoy the benefits of plunging gasoline prices this holiday season, it is still unclear how cheaper crude will impact the overall health of the U.S. economy.

One Washington think tank has estimated that, though many parts of the country will experience a slight economic stimulus in 2015, the lower oil prices will bring a significant downturn in the economic health of energy dependent states.

Unprecedented production in the United States shale plays have contributed to an increase in worldwide oil supplies, resulting in gasoline prices plummeting to their lowest level in almost five years. This has proven to be an economic boom of sorts to American families who are pocketing an additional $25-$75 per month. An additional perk will come as reduced fuel costs will eventually affect the pricing of consumer goods and services.

Stephen Brown with Resources for the Future writes that, “The reduction in oil prices provides US consumers with what amounts to an annual increase in disposable income of $350 billion (about 2.0 percent of US GDP) through reduced prices for gasoline, diesel fuel, other petroleum products, and goods and services whose production uses petroleum products. The average US household will see a raw gain that amounts to $2,790 per year.

The economic picture is not so rosy for everyone. Energy producers and states that are heavily invested in oil production will take a hit in 2015. Some companies have announced they will slash their budgets, with many predicting cuts in their exploration efforts. This will have a ripple effect that will impact local economies and support industries as tax revenues are reduced and layoffs are inevitable.

Download the entire report from rff.com.

Bakken Study Analyzes Impact of Oil Prices on Development

Bakken Well Recovery Costs Graph
Bakken Well Recovery Costs Graph

Bismarck, ND-based KLJ Engineering recently completed a study commissioned by the North Dakota legislature to provide decision makers with data about the Bakken's potential economic impact on the state through 2019.

The full KLJ report, released in September of 2014, focused on 19 oil & gas producing counties in North Dakota, and incorporated three approaches to forecast the sustainability of oil and gas production:

  • Economic analysis of the Bakken and Three Forks formation
  • Projections of population, employment and housing needs
  • Potential for CO2 enhanced oil recovery (EOR)

Of particular interest to industry is the impact of falling oil prices on future development. Earlier this month, Lynn Helms, the Dir. of North Dakota's Department of Mineral Resources (DMR), said two things could hurt production: low oil prices and new flaring regulations.

Read more: Bakken Development Threats on the Horizon

The KLJ study provided some interesting insight into how oil prices would impact production based on (IP) rates. In the core areas for development (McKenzie, Williams, Mountrail and Dunn Counties) most wells are well above 1,000 b/d, but on the fringes of these core areas, IP rates tend to be lower.

According to the study, at the $70 per barrel price, a well IP of 500 b/d would never recover its costs. In order to recover well costs within 5 years, a 500 b/d IP well would need oil prices to exceed $100 per barrel. In stark contrast, modeling sensitivity scenarios such as large drops in prices down to $35 per barrel with high IP wells, which are common in parts of the Bakken/Three Forks, still have positive economic returns. Based on modeling outputs, IPs of 500 b/d or less will not be attractive to companies if well costs equal $7.5 million, and oil prices are in the vicinity of the 2014 average price of $85 per barrel. Conversely wells in the 500 to 750 bpd IP range are attractive, but susceptible to oil price fluctuations. Wells having at least 1,000 bpd IPs are attractive at current or higher oil prices, and for the most part, will still be attractive even with a reduction in oil prices. In discussions with industry representatives, companies generally expect to recover costs in three years or less, and a five-year payback time frame would be acceptable only in very unusual circumstances.

BakkenShale.com will provide additional details and commentary centered around the KLJ study in future posts.