By Tsvetana Paraskova
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.
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, abandoning the ‘production growth at all costs’ strategy as investors demanded returns and profits.
But after prices collapsed to multi-year lows with the crash in demand from the pandemic along with the Saudi oil price war, the U.S. shale patch was very quick to pull back investment and drilling activity.
Due to the oil price crash, the global glut, and lack of storage, U.S. oil firms are announcing production curtailments by the day.
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.
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.
The outlook on the U.S. production is uncertain, according to Dallas Fed economists.
“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.