- Oil and gas sector investments have grown as a share of total U.S. nonresidential business fixed investments.
- The share of the oil and gas industry’s investment of U.S. nonresidential business fixed investment is an important component of the country’s GDP.
- But after prices collapsed to multi-year lows with the crash in demand, the U.S. shale patch was very quick to pull back investment and drilling activity.
- The industry capital expenditures (capex) to plunge by about 35 percent during the second quarter of 2020.
- The drilling slowdown makes it likely that U.S. output will struggle to reach its previous highs in coming years.
A recently published article in OilPrice, written by Tsvetana Paraskova bringsforth the causes and effects behind the present drop in U.S. fixed investment.
Then a profit making sector
The drastic spending cuts across the U.S. shale patch due to the low oil prices will likely lead to a 6.1-percentage point slump in total U.S. business fixed investments in the second quarter, Dallas Fed economists said in a new analysis this week.
Over the past decade, oil and gas sector investments have grown as a share of total U.S. nonresidential business fixed investments, thanks to the shale boom. In the 2010s, U.S. oil firms spent a total of $1.2 trillion on drilling and completing wells, boosting U.S. crude oil production by almost 140 percent in the past decade. The share of the oil and gas industry’s investment of U.S. nonresidential business fixed investment – an important component of the country’s GDP – averaged 6.4 percent, double for the share in the previous decade, the Dallas Fed noted.
Oil prices plunge
- Even before the oil price collapse in early March, some U.S. oil firms had started to reduce planned investments for 2020 by 10-20 percent.
- It is to abandon the ‘production growth at all costs’ strategy as investors demanded returns and profits.
- The U.S. shale patch was very quick to pull back investment and drilling activity due to price collapse and Saudi oil price war.
- Due to the oil price crash, the global glut, and lack of storage, U.S. oil firms are announcing production curtailments by the day.
Industry capital expenditures to plunge by about 35 percent
The Dallas Fed expects industry capital expenditures (capex) to plunge by about 35 percent during the second quarter of 2020—a drop steeper than the declines in first-quarter 2016 and during the oil bust of 1986.
“While U.S. oil production growth was already on the verge of leveling off due in part to the steep output-decline rate of existing wells, the drilling slowdown makes it likely that U.S. output will struggle to reach its previous highs in coming years,” they said.
The 35-percent crash in investments in the energy sector is set to be a significant drag on total U.S. business fixed investment this quarter, with U.S. fixed investment expected to drop by 6.1 percent.
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Source: OilPrice
