Oil: US shale’s big squeeze

In most other American cities, the sign at the Conoco station advertising petrol for $1.29 per gallon would be welcome. In Spring, Texas, a suburb on the northern side of Houston, it is a warning. Cheap petrol is a result of the collapse in the oil price, which dropped briefly below $28 a barrel this week, a 13-year low, from $115 for Brent crude in June 2014. It has prompted a grim realisation in Houston, the capital of the US oil business, that the quick rebound many hoped for is not going to come.

Dozens of oil and gas companies went into bankruptcy last year, and tens of thousands of jobs were lost, but that was only the beginning. A reckoning is approaching that will sweep away the weaker US oil companies and force profound changes at the stronger ones. It will be a moment of truth for the North American shale revolution, which has transformed prospects for gas and oil in the US.

At $40 for a barrel of oil, the question of whether companies might need to make further big cuts in spending and jobs might have been debatable, says Dennis Cassidy of AlixPartners, a consultancy. At under $30, the question answers itself. “People are not going to press on the brakes,” he says. “They’re going to slam on the brakes.”

The shale revolution cannot be killed: the technological breakthroughs that made it possible cannot be unlearnt. US oil production can be expected to make a comeback when prices rebound. But shale oil companies have been living in an age of innocence: the industry had never seen a downturn. Not any more.

Shale today feels like information technology did as the dotcom bubble burst in 2000. Technological progress has created opportunities that will shape the world for decades to come. But investors who were lured by that promise into making rash commitments are going to lose a lot of money, and that will have lasting effects, too.

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