Global oil production has resulted in an oversupply that if continued will bring a consolidation among domestic producers as prices fall toward their breakeven level.
The futures prices of the benchmark West Texas Intermediate have fallen below $61 per barrel over the next 12 months on news that OPEC+ intends to increase production, which poses a downside risk to the price of oil.
While this is all good news for U.S. households and businesses anxious about inflation, the current price of $61.87 per barrel is perilously close to the breakeven price for U.S. producers. In short, lower prices will make it tougher for U.S. producers to remain competitive with OPEC+.
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Current estimates of the breakeven rate for producers fall within a range of $61 to $70 per barrel depending on the producers’ size and their region.
That price level implies that recent exhortations for increased production by OPEC+ will make it difficult for U.S. producers to maintain output and market share.
As we show, there has been a relationship between the number of rigs and the price of crude. But the global energy market is complex, with the relationship between supply and demand distorted by a cartel of highly efficient suppliers and with demand undergoing a shift in structure.
This most recent decline in rigs comes as U.S. producers have become more efficient and demand has waned as consumers move to electric vehicles and greater energy-efficiency in their homes.
In the end, should OPEC+ continue to increase production there is a growing risk that smaller and less efficient U.S. oil producers will fall by the wayside, causing a loss of U.S. market share, a decrease in producers and a loss of jobs.
