Energy independence was a major government policy in the U. S. since the 07/08 financial crisis and economic recession. Shale oil industry has been booming thanks to the government stimulus and breakthrough of drilling technology. Oil production has increased significantly and many jobs were created to help reduce unemployment rate.
The increased oil production has given the U. S. enough leverage to “regulate” the oil prices in the global market for years to come. Historically the prices were primarily set by major oil production nations, such as OPEC. This price control mechanism has now been revised to 2.0 where the U. S. will have dominant role. The recent plunge of the oil price is a test of the new control mechanism.
However, ultra low oil price is not all that good for the U. S. Going forward, I think regulations will be introduced to the shale oil industry, so that the production will be at more orderly pace, the prices will be modulated at up and down directions. Most importantly, regulation in shale oil will help sustain and further develop new green energy technology.
On the beige book released on last Wednesday, the Federal Reserve showed some concern of ultra low oil prices and its negative impact on the economy. “The Dallas District indicated that growth slowed slightly during the reporting period and that several contacts expressed concern about the effect of lower oil prices on the District economy,” the beige book said. The concern of the Fed will have large impact on the government macro policy on oil prices.
Meanwhile, the oil production and service companies started to respond by cutting investment on new development and reducing work forces. The drill of shale oil well takes as short as a few weeks and the production is usually only good for a few months.
The dynamic response of the shale oil is therefore in a scale of several months. This is in contrast to the traditional oil production, where the response could take years. The fast dynamic response is expected to help quick recovery of oil price this time. On Friday, the IEA revised its forecast for oil-supply growth this year, slashing it by 350,000 barrels a day. The agency now expects an extra 950,000 barrels a day to be pumped around the world in 2015, compared with 1.9 million barrels a day of new oil supply in 2014. Much of that oil is coming from U.S. shale fields.
In summary, I think the oil price, in this cycle, has bottomed out last week and will move toward $70 – $80 a barrel at a faster face than in other cases.