The oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s. Earnings are down for companies that made record profits in recent years, leading them to decommission more than two-thirds of their rigs and sharply cut investment in exploration and production. Scores of companies have gone bankrupt and an estimated 250,000 oil workers have lost their jobs.
The cause is the plunging price of a barrel of oil, which has fallen more than 70 percent since June 2014. The question on the minds of many people: why has the oil price been dropping?
This a complicated question, but it boils down to the simple economics of supply and demand. Domestic production in the United States has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.
On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient so demand for fuel is lagging a bit. Motorists and home owners that use oil to heat their houses end up benefitting from the plunge in oil prices. However, oil-producing countries and states such as Venezuela, Nigeria, Ecuador, Brazil and Russia are just a few petrostates that are suffering economic and perhaps even political turbulence. Needless to say, the overall oil industry has also suffered as many companies have gone bankrupt and others are struggling to keep their heads above water.
Hydraulic fracturing has helped boost the rate at which oil and gas can be extracted from wells, particularly in the United States. By increasing the current available supply, fracking helps to lower oil prices on a global scale. This is particularly true domestically, since oil does not have a historically strong local market in the U.S. Basic economics states that as the supply of any good increases, its relative cost decreases. The degree to which these decreases occur depend on many factors, including the elasticity of the good. Even though oil is a natural resource, it has no productive economic use unless it is extracted. This means that the real supply, in a productive sense, is limited to what engineers and well technicians can provide. Fracking lowers the cost of oil to the extent that it allows real supply to expand.
What exactly is hydraulic fracking? The term fracking refers to how the rock is fractured apart by the high pressure mixture. Fracking is the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside. Water, sand and chemicals are injected into the rock at high pressure which allows the gas to flow out to the head of the well. The process can be carried out vertically or, more commonly, by drilling horizontally to the rock layer and can create new pathways to release gas or can be used to extend existing channels.
There are limits on the extent to which fracking can be used to increase supply. Oil is scarce, and hydraulic fracturing is more expensive and complicated than traditional oil extraction. If the global supply of oil increases and oil prices drop far enough, then the high expense of fracking is no longer justified. In other words, the success of fracking eventually imposes a limit on itself, unless technological changes make the technique less costly.
Sources:
http://ecowatch.com/2015/09/15/fracking-boom-bust-opec/
http://www.what-is-fracking.com
http://www.livescience.com/34464-what-is-fracking.html
http://fortune.com/2015/12/22/oil-price-plunge/