No doubt about it. Drill Baby Drill is not happening in the US after a $15/bbl fall in the price of oil over the last 5 days. For an industry that has spent much of the last decade focused on profitability, lower oil prices simply are not going to result in an increased desire to pump more oil. Most of the commentary over the last few days has revolved around industry not making any rash decisions yet, and while that is fair, it’s also fair to assume that downside scenarios are being run at every company right now. If prices don’t rebound in short order, and hey anything is possible, then it’s fair to wonder what the downside to capital spending might be.
With the help of Grok AI, here are some potential impacts to the US oil industry as a result of the recent price drop, should it prove to be long lasting:
Profitability and Production Cuts: Many U.S. shale producers, particularly in regions like the Permian Basin, have breakeven costs ranging from $50 to $70 per barrel. A $15 drop—say, from $75 to $60 per barrel—pushes prices closer to or below breakeven for some operators. Smaller, less efficient firms may halt drilling or reduce output, as seen in past price slumps. Larger companies with lower costs or diversified operations are better cushioned but may still scale back investment in new wells.
Job Losses and Economic Ripple Effects: The oil industry supports millions of jobs, directly and indirectly, especially in states like Texas, North Dakota, and Oklahoma. A sustained $15 drop could lead to layoffs in drilling, equipment manufacturing, and related services. For context, the 2014–2016 oil price crash saw over 100,000 U.S. energy jobs lost. While not as severe, a similar trend could emerge, particularly in high-cost regions.
Investment and Capital Spending: Lower prices squeeze cash flows, reducing capital budgets for exploration and new projects. Shale’s quick response to price changes means operators can idle rigs fast, but this slows future production growth. The U.S. Energy Information Administration noted in early 2025 that falling prices could lead to fewer active rigs in 2026, especially if prices dip below $60.
Regional Variations: The Permian Basin, which drives much of U.S. production, has some of the lowest breakeven costs, often below $50 per barrel. Producers here may weather the drop better than those in higher-cost plays like the Bakken or Eagle Ford. However, even Permian operators could face pressure if prices fall further or stay low for months.
Overall, a $15 drop isn’t catastrophic but pressures margins, slows growth, and risks job cuts, especially for smaller players. If prices stabilize above $50–$55, the industry can adapt; below that, deeper cuts loom. Long-term, U.S. shale’s flexibility means it can bounce back if prices recover, but sustained low prices could reshape the sector’s footprint.
Key Factors Influencing Capex Cuts
- Price Sensitivity of Shale: U.S. oil production, dominated by shale, is highly responsive to price changes. A $15 drop—e.g., from $75 to $60 per barrel—reduces cash flows and impacts drilling economics, prompting companies to trim capex to protect balance sheets.
- Breakeven Costs: Shale breakevens average $50–$70 per barrel, with the Permian closer to $40–$50. At $60, many operators remain profitable but cut discretionary spending on growth projects to conserve cash.
- Historical Precedents: During the 2014–2016 oil price crash (when prices fell from $100+ to below $40), U.S. oil and gas capex dropped by 40–50% industry-wide. A milder $15 drop won’t trigger that scale, but it still signals restraint.
- Current Spending Levels: In 2024, U.S. upstream oil and gas capex was estimated at $150–$180 billion annually (per EIA and industry reports). This provides a baseline for 2025 adjustments.
Estimating the Cut
- Rule of Thumb: Analysts often estimate that a $10–$15 per barrel price drop leads to a 10–20% reduction in capex for shale-focused firms, depending on their cost structure and hedging. This reflects the need to align spending with lower revenues while maintaining core operations.
- 2025 Context: Assuming oil prices fall from a $75 baseline to $60 and stay there, companies might cut capex by 15% on average. At the low end (10%), cuts prioritize marginal projects; at the high end (20%), even efficient operators scale back.
- Dollar Impact: Applying a 10–20% reduction to a $150–$180 billion baseline:
- Low end (10%): $15–$18 billion in cuts.
- High end (20%): $30–$36 billion in cuts.
The bottom line is that the oil price correction is only 5 days old and companies do not need to overreact at this point. While much of the above is based upon prior downside scenarios, it’s also worth pointing out that company balance sheets are generally in much better shape than before prior downturns, so the ability to weather the storm may be higher. The volatility could easily swing back the other way at a moment’s notice, but until it does, companies will likely begin evaluating their options to reduce discretionary capital.