The price of oil has fallen so low it’s threatening the feasibility of controversial and expensive drilling projects proposed in the Canadian Oil Sands and the Arctic. West Texas Intermediate, the U.S. benchmark for crude, is going for less than $90 a barrel. That’s approaching the break-even point for profitability at many of the very wells driving the American oil boom.
“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, told Bloomberg News reporter Isaac Arnsdorf. “It will be uncharted territory.”
At the current price of about $87 a barrel, cheap American crude undercuts many of the most aggressive oil projects under consideration by the oil majors. About $1.1 trillion of capital expenditures have been earmarked through 2025 for projects that require a market price of more than $95 a barrel, according to a May study by the Carbon Tracker Initiative, a London-based think tank and environmental advocacy group.
*company share of capex requiring $95/bbl+ shown only. Where more than one of the companies under review has an equity stake, aggregate share of copex is shown. **as understood based on company disclosures.Investors representing $3 trillion of assets under management have been pressuring oil companies to reduce spending on speculative projects and return profits to shareholders. For the past few years, “stranded assets” has been a buzzword among environmentalists seeking to sway investors about climate policy. The argument goes something like this: As countries ramp up taxes on carbon pollution, the added cost will make the most expensive oil projects unprofitable, so companies shouldn’t be throwing away money on new decades-long boondoggles.
Today’s cheap oil must be a conundrum for environmental strategists, who for years have argued against the Keystone XL pipeline and other expensive and heavily polluting oil projects. In this case, prices aren’t being driven lower by carbon taxes or reduced demand from energy-efficient technologies. Instead, oil is cheap because there’s just so much of it.