il producers in the US have already ridden to the rescue of consumers once this decade. Soon they may have a chance to do it again. The oil market has been hit by a series of shocks, from wildfires in Canada to militant attacks in Nigeria, which have taken an estimated 3m barrels a day from global supplies.
The glut that has sent prices plunging since 2014 has been clearing faster than expected. Internationally traded Brent crude, which was about $27 per barrel in January, is hovering at about $50. With Russian production expected to decline and Venezuela staring into the abyss, there is a real risk that further disruptions will drive prices higher still.
If oil does rise above $50 and stay there, all eyes will turn to the US to see how its shale industry will respond. A revolution in US oil production started in 2010, as companies worked out how to use the techniques of horizontal drilling and hydraulic fracturing, or “fracking”, already applied with great effect on gas reserves, to extract crude as well.
In the early 2010s, rather like today, the world was hit by a series of disruptions to oil supplies, including the sanctions imposed on Iran over its nuclear programme and the civil war in Libya. Oil prices were high, generally more than $100 a barrel, but would have been much higher but for the US production boom, which added 4m barrels a day to supply over 2010-15.
The plunge in prices has blasted the fragile finances of the small and mid-sized companies that led the US shale revolution, and bankruptcies have been piling up. The number of rigs drilling horizontal wells in the US has dropped by more than three-quarters from its pre-crash peak in October 2014.
The producers, though, have made remarkable strides in cutting the costs and raising productivity, meaning that they can be financially viable at much lower crude prices than they needed before the slump.
If oil prices stay above $50 for any length of time — and even more if they stay above $60 — US producers will start putting rigs back to work.
EOG Resources, a Texas-based company that was one of the pioneers of shale oil production, said earlier this month that it could earn “triple-digit rates of return” with oil at $60, “and if history is any indication, we will continue to push the oil price needed for triple-digit returns even lower.”
The “frackers” kept a lid on oil prices in the first half of the decade and if their promises can be believed they will do the same in the second half as well.
For consumers, it is a reassuring prospect. Another oil price shock should be averted, unless global supplies are hit by much larger disruptions than the difficulties they face today. Any countries that need a much higher price to keep their fiscal balances sustainable, however, will have to think very hard about their future.
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