Crisis in Oil Forces Efficiency at Low Prices


When crises such as a crashing commodity price hit an industry, the companies of said industry necessarily become more efficient or fall into the oblivion of the quickly-forgotten bankrupt and bought-at-bargain companies. The ongoing struggle with profitability in the oil field, perpetuated by a lingering decrease in the price of oil, has forced companies to make necessary, sometimes painful, cost cuts. There are both drawbacks and benefits to cost cutting,

Interestingly, during times of crisis, certain companies, usually the ones that survive the downturn, find that they have adopted or created new processes and systems which enable profitability under abnormal circumstances. For the oil and gas industry, this means companies have to figure out how to maximize profit with a lower selling point for their product.

This represents a real challenge, because as the price of oil rises, all parties involved want a larger slice of the pie. Both drillers and oil suppliers in the oilfield had been used to the benefits of the triple digit price of oil and had become rather lax with the ease of profitability. R.T. Dukes, an analyst at Wood Mackenzie, an international consulting firm focused on various commodity markets, stated “Costs had gotten pretty astronomical. In a high-price world, you really seek out production at all costs. When prices are low, you focus on costs.” It is obvious where that focus is now.

Operators in the field have managed to cut down shale oil, traditionally a more expensive form of oil due to the extraction process, to $41 a barrel in Texas, according to Wood Mackenzie. The cost varies throughout different states, but overall most companies have figured out a way to survive with smaller margins. These benefits will hopefully stay with these companies when the downturn ends, leading to increased profitability and operational efficiency.

Article written by HEI contributor Timothy McNally.

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