Producers keep pumping, even with oil prices falling

When a commodity costs more to produce than the current market price, producers usually stop producing it.

When it comes to U.S. crude oil, that's not happening, according to an analysis of global oil production by Wood Mackenzie, a commodities market research firm.

The oil glut continues to weigh on crude prices, but the decision to stop pumping when prices fall is not as simple as it may seem.

For starters, the cost of producing a barrel of oil varies widely from one well to another, based on the initial cost of finding and developing the oilfield, along with such costs as borrowing, current operations and maintenance.

Some of the recent expansion of U.S. crude production, for example, has come from so-called "stripper" wells — once abandoned finds that are seeing new life thanks to advanced production techniques. Many of these are profitable even at current market prices.

But at $35 a barrel, roughly 3.5 million barrels a day of current global crude output costs more to pull out of the ground than it's worth, according to Wood Mackenzie's analysis. So why do the operators of those wells keep pumping?

"The operator's first response is usually to store production in the hope that the oil can be sold when the price recovers," said Wood Mackenzie analyst Robert Plummer.

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For some producers, the high cost of stopping and restarting production has also spurred them to keep pumping and hope prices will rise again soon, he said.

In the United States, falling prices have forced producers to idle exploratory drilling rigs and cut back investment in new discoveries.

But production from existing wells has barely budged — down by just 100,000 barrels a day, by Wood Mackenzie's estimates, or about 0.1 percent of global production.

As a result, the world's storage facilities are awash in oil. In the U.S., stocks of crude and petroleum products are well above five-year highs.

At the same time that production continues to grow, global consumption is softening — in part due to an economic slowdown in China and throughout much of the developing world.

In the past, when rising surpluses pushed crude prices lower, major producers like Saudi Arabia cut back output to tighten supplies, thereby boosting prices. But as American and Canadian producers have expanded production, Middle East producers continue to pump, hoping the crash in prices will push higher-cost North American producers out of business.

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So far, the strategy seems to be backfiring.

Crude oil prices leveled off at about $32 per barrel on Tuesday, after falling close to a 12-year low.

Some market watchers continue to slash their forecasts for oil prices. Last month, Standard Chartered warned its clients that crude could fall to as low as $10 a barrel this year. Others, including Wood Mackenzie, expect crude prices to recover this year to an average price of about $40 a barrel.

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Until the outlook becomes clearer, a few producers have decided to stop pumping. The biggest cuts have come from high-cost oil sands and onshore fields in Canada, older U.S. onshore projects and aging U.K. North Sea fields, according to Wood Mackenzie.

Worldwide, production continues to rise. Aside from increased Saudi production, OPEC's second biggest producer, Iraq, plans to export a record 3.6 million barrels per day from its southern terminals next month, sources told Reuters. Iranian oil exports are also expected to rise later this year now that sanctions against that country have been lifted.

As U.S. producers keep pumping, there are no signs that crude production is slowing elsewhere, even as the crash in prices take a toll on major oil-producing economies. Saudi Arabia, which depends on oil revenue for the bulk of its government spending, has slashed various domestic subsidies and announced plans to raise taxes.

For consumers, the drop in crude oil prices has brought a windfall at the gas pump.

The average price for a gallon of regular gasoline this year was the second-lowest of the last 10 years, according to AAA, which tracks pump prices. Gas is cheaper than it's been since 2009, when the Great Recession sidelined millions of workers and prompted many people to cut back on driving.

Since mid-2014, when oil prices began falling, U.S. households have saved roughly $115 billion a year, while the level of personal savings rose by $120 billion, according to Steve Murphy, an economist with Capital Economics.