The Donald is about to enter the oil patch

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Paul Danish

Prediction: If you want to know where the Trump administration is headed, start by reviewing what’s been going on in the oil patch for the past couple of years.

In October 2014, the number of drilling rigs actively targeting oil in the U.S. topped out at 1,609. Nineteen months later, in May 2016, the number bottomed out at 314.

The collapse of the rig count was driven by the collapse of oil prices, from about $107 a barrel in June 2014 to $26 a barrel in February 2016.

The price collapse resulted from a surge in domestic U.S. oil production from shale formations made possible by high prices, horizontal drilling and fracking, which produced an oil glut — and by a decision by Saudi Arabia and its OPEC partners not to cut production in order to shore up the price of oil.

At the time, OPEC’s member states could produce oil for less than half of the break-even price of U.S. shale oil producers. OPEC’s thinking was that if they flooded the market with cheap oil they would drive the American shale oil producers out of business and raise prices later.

It was a beautiful theory done in by two ugly little facts.

The first was that while the price collapse did some real damage to American shale oil producers there were scores of bankruptcies, acquisitions and mergers, and tens of thousands of people lost their jobs — it failed to destroy the industry.

That’s because the industry figured out how to cut the average cost of producing a barrel of oil from shale in half in the space of two years — from about $60 a barrel to $30 a barrel in the Bakken shale of North Dakota for example.

In some areas the cost of producing a barrel of oil plunged even further. According to a report put out by the Institute for Energy Research, in Dunn County North Dakota, “there are about 2,000 square miles where the cost to produce Bakken shale oil is $15 a barrel, which is about the same as Iran’s cost ($15.60/bbl), and a little higher than that of Iraq ($11.38/bbl).” (Saudi Arabia’s per barrel production cost was given as $12.50 and Kuwait’s as $10.15.)

Similar drops are occurring all over the country.

The price drops are largely the result of improved technology and drilling techniques. And by embracing them, the industry survived.

Although the rig count dropped by nearly 1,300, domestic crude production from shale declined by only about 1 million barrels a day, enough to eliminate the glut but not sink the industry. And after bottoming out in February, the price of oil started going up again And by May, so did the rig count. As of December 30 it was up to 525, and domestic oil production was increasing.

Then OPEC and Russia announced they would cut their production by 1.8 million barrels a day to raise prices, starting January 1.

As of January 2, international oil prices were up to $54-$57 a barrel. At those prices, shale oil producers can make a lot of money, and those with acreage like that in Dunn County can make out like bandits.

That brings us to the second fact that derailed OPEC’s attempt to kill American shale oil production: OPEC might be able to produce oil at $10 to $15 a barrel, but it can’t afford to sell it cheaply indefinitely. That’s because most OPEC members fund their governments with oil revenues. Petro-dollars pay for their armies, their infrastructure and the welfare state benefits that keep their populations relatively docile. In order to meet those expenses they need to get $50 to $60 a barrel minimum, and a lot more in some cases.

If OPEC members didn’t raise prices by cutting production, they ran the risk of losing their ability to govern.

But won’t another U.S. oil boom quickly lead to another oil glut and price collapse? Eventually yes, but not quickly. That’s because of another development that’s been almost entirely overlooked — a year ago Obama lifted the ban on U.S. crude oil exports, which has been in place since the 1970s. As of last September, U.S. crude exports had reached to 692,000 barrels a day, and they’re growing fast.

Since OPEC needs to defend an oil price well above the cost of U.S. shale oil production, U.S. companies can become serious exporters.

All of this explains a lot about what the Trump administration is likely to do when it takes power in two weeks.

Trump has promised to crank up the economy and produce a lot of blue collar jobs. The fastest way to do this is to reignite the shale oil boom, keep the cost of producing American oil heading south and enable greater exports of crude.

Moving crude by pipeline instead of train knocks $10 off the price of a barrel of crude. Trump’s first move will be to resurrect the Keystone XL pipeline and approve completion of the Dakota Access pipeline and several more.

This will horrify anti-oil and anti-pipeline protesters, of course. They will do everything they can to stop it. Just guessing here, but I suspect Trump is looking forward to the fight. Shale oil and pipelines to carry it is a perfect wedge issue with which to split the Democratic Party.

And taking down anti-pipeline protesters as swiftly and decisively as Reagan took down the air traffic controllers would give him the same sort of early victory that shows he came to play and is not to be trifled with.

This opinion column does not necessarily reflect the views of Boulder Weekly.