Oil prices continued to collapse Monday and are getting closer to levels that could dampen the U.S. energy boom.
West Texas Intermediate crude, the U.S. benchmark, traded below $85 a barrel on Monday and has plummeted by more than 20 percent from this summer.
Raymond James energy analyst Pavel Molchanov said he thinks a drop into the $70 to $80 range could start triggering meaningful cutbacks in investment in U.S. production.
“I think there will be some spending reductions even now simply because companies are going to generate less cash flow at $85 a barrel than they did at $105,” Molchanov said. “But as far as a significant amount of more meaningful curtailment in activity, we’re not there yet.”
The U.S. is producing more crude oil than it has in nearly 30 years. Production is forecast to reach 9.5 million barrels a day next year, which would be the most since 1970, according to the U.S. Energy Information Administration.
The boom is a result of drilling shale rocks through the techniques of fracking and horizontal drilling, and the question is how high oil prices need to be in order to make it profitable.
The surging U.S. production is one of the reasons behind the worldwide oil price drop. Other factors include a weakening global demand for oil and the increase in Libyan oil drilling over the summer (the troubled nation managed to boost its output from 200,000 barrels a day to 900,000 by the end of September), according to EIA analyst Michael Leahy.
Leahy attributed weakening oil demand to lower than expected economic growth in Asia, especially China, and declines and stagnation in European countries.
Jamie Webster, senior director at the global energy consulting firm IHS, said he thinks that American oil producers can sustain a price drop to $80 a barrel for six months or so before making substantial cuts.
But no one is sure how companies will react, he said, because the shale boom is fairly new and the U.S. producers haven’t been tested in a sustained time of lower prices.
“For a lot of people in the market it’s really a period of discovery to try and figure out what is going to happen,” Webster said.
If oil prices keep going down and stay there long enough, though, it’s clear there will be an impact on the U.S. economy, Webster said.
“We will be benefiting from cheaper gasoline prices, but we will also be seeing a hitch. A lot of the job growth in the U.S. has come from oil and gas and related industries, and those will see the growth fall off or even starting to let a couple of people go,” he said.
The drop in crude prices is already having an impact on gasoline prices. The average price for a gallon of regular gasoline in the U.S. on Monday was $3.20, according to the AAA automotive club, down from $3.68 a gallon going into the Fourth of July weekend.
So far Saudi Arabia, in what could be an effort to keep rival U.S. producers from growing too much, does not want to lower its oil production to drive up prices.
But that could change if the prices go down too much.
The price of Brent crude, the international benchmark, fell to just over $88 a barrel on Monday, the lowest level in nearly four years.
Webster said an improvement in Asian economies could result in oil prices going back up, as could any additional sanctions on Iran or future instability in Libya.