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The Double-Edged Sword of Low Oil Prices

Posted By Lyndsey Kleven, Communications Coordinator, Wednesday, February 04, 2015

The ebb and flow of oil prices is nothing new to anyone who has monitored the oil and gas industry for a length of time. The last peak in oil prices was seen in June 2014, when crude oil was selling for nearly $110 a barrel—fast forward six months and we’re looking at average prices below $55 a barrel. In July 2008 the national average price of regular gas was $4.06 and today it’s just over $2 ($2.05). With prices plummeting by half, there are going to be some clear winners and loser. 

The obvious winners are consumers that are saving money at the gas pump. Prices at the pump have dropped drastically as a direct result of lower crude oil prices. Cheaper oil is giving money back to the consumer that in turn, boosts spending and the economy elsewhere.

Ohio was among the first states in the US to see gas prices drop below $2 in mid December. The last time prices dropped below $2 a gallon was nearly six years ago in early 2009. Low crude oil prices have paid dividends at the pump, what is equivalent to a $750 tax cut for the average American household.

Lower pump prices are nice but people aren’t realizing the cost that it is taking the industry. The prices continued to drop following the Organization of Petroleum Exporting Countries (OPEC) meeting late in 2014, when the group opted not to cut production. The ramifications vary among countries, crippling to some nations while lifting others. In the United States, it’s most adversely impacting the American shale oil and gas producers responsible for the domestic energy boom.

Shale oil, which is extracted from the ground through horizontal drilling combined with advancements in hydraulic fracturing technologies, is a relatively expensive process, requiring oil to sell around $70 a barrel to be economical. When drilling new wells no longer makes economic sense, many companies will decide to pull back their drilling programs. Ohio has already begun to see this take place. With investment being dramatically cut back, the U.S. and Ohio are losing some of its high paying energy jobs.

The ripple effect is being felt across the whole energy industry, affecting thousands of people—including Ohio’s conventional operators. Revenue from higher oil prices isn’t there and all producers are tightening their belts and watching every penny they spend.

While prices are low, drilling new wells will also remain low. As long as conditions in Ohio remain favorable to oil and gas exploration, drilling activity is expected to flourish once the market rebounds. 

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