US energy independence race producing tons of oil, not so much profits

The United States is currently producing over a million barrels a day more of oil than it was last year at this time, according to the EIA, making it look like U.S. energy independence is within our grasp.

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That being the case, one would think this must be the best of times for U.S. oil producers and oil service companies. Instead, for many of them it is the worst of times as the industry struggles. That hit home this week when Weatherford International PLC, a Swiss-based oil-field services company, filed for bankruptcy protection after its bondholders approved a restructuring agreement that will reduce its total debt by about 70 percent.

This bankruptcy, the biggest in the shale patch in years, should be a warning sign to an oil and world market that has been taking the incredible achievements in U.S. oil production for granted. Oh sure, U.S. shale producers have been prolific with oil production, but not so much with actually making profits.

The wildcatting ways and optimism that brought on the shale revolution also led to overproduction and companies taking on way too much debt. According to the New York Times, at least six energy firms have gone bankrupt this year. Over the last 4 years the number is about 175 firms in the United States and Canada, with debts totaling almost $100 billion in bankruptcy protection.

It is mainly because they are not making money. Over the last 10 years, 40 of the largest independent oil and gas producers collectively spent roughly $200 billion more than they took in from operations, according to the Wall Street Journal.

This has forced a cutback in spending and has caused pain to all sectors of the industry, especially oil services. Marquee names like Schlumberger Ltd. and Halliburton Co. have seen their stock prices take a hit.

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And while this cost cutting is mandatory for these producers to stay in business, it also means that U.S. oil production growth could stall out and already, we are seeing the rate of oil production growth decline.

In the meantime, the reality is that the market is probably underestimating demand. Many have been pointing to weakening manufacturing growth as a sign that oil demand will crash, but what we have seen in the recent past is that this coupled with lower interest rates around the globe can change things very quickly.


If demand does bounce back it will be up to the U.S. shale patch to make up the difference. That won’t happen unless oil prices are much higher.