Colorado Energy Industry in State of Transition

The low price of gas across the nation has drivers and most consumers celebrating. According to gasoline price tracking service GasBuddy, the national average  for a gallon of fuel stood at $2.11 as of April 20. Compared to a year ago, that's almost 35 cents per gallon less than what drivers had been paying. In Colorado, average prices clocked in at $2.07 statewide. However prices were as high as $2.40 in certain counties, particularly the more remote western areas of the state.

"Cheap oil can be explained through simple supply and demand."

Unfortunately, what's been good news for the typical consumer has been troubling for the oil and gas industry. The price of fuel has reached historic lows because the price of crude oil, the natural resource that is refined to make gasoline, has reached its lowest level in about 12 years. The reasons behind crude oil's declining prices are numerous, but it primarily boils down to simple supply and demand , according to an interactive graphic from The New York Times. On a national as well as a global scale, the supply of oil and oil-derived products is near an all-time high.

Meanwhile, demand for oil and gas around the world has slowed due to weak economic activity. This has led to a situation where oil wholesalers are trying to get rid of their product as fast as possible, which makes prices go down. With so much oil and fewer people willing to buy it than expected, companies that drill for oil like Shell, BP and Exxon-Mobil are losing money with each passing day.

The ones who have been hit particularly hard by cheap oil are producers based in the U.S., including those operating out of the Niobrara shale formation. This area, which stretches over much of northern Colorado as well as part of Wyoming and Nebraska, is the source of over 800 barrels of crude oil per day , according to the U.S. Energy Information Administration. Almost 3,000 cubic feet of natural gas are produced from this region each day as well. This makes it a vital part of Colorado's economy. But with changes in the price of oil and gas, as well as new regulations that look to cut back on certain types of oil drilling, much of this production is in jeopardy.

Economic effects

In the more immediate term, the economic effect of oil's low demand and high supply will have the biggest impact on Colorado's energy industry. According to Bloomberg News, U.S. shale oil drillers, including those in Colorado's Niobrara formation, are planning to cut production  to the lowest level in three years in response to low sales prices. This comes after five straight years of high levels of output and steady revenues for these companies.

Shale oil drilling is different from conventional oil extraction, making it less economically feasible in a low-demand environment. Much shale oil production, including that which occurs in Colorado, involves a process called hydraulic fracturing, or fracking. The basic process of fracking involves the injection of high-pressure water, sand and some chemicals deep into the ground, breaking up oil and natural gas trapped within rocks. The oil and gas is then extracted and must undergo more intensive refining before it can be used for fuel. Since it is much more complicated than conventional oil drilling, shale oil is more expensive, and thus is only profitable when crude oil prices are high. According to Energy and Capital, shale oil production can turn a decent profit  when crude oil is trading for at least $60 per barrel. As of late April, crude oil is hovering around $40 on the market. This is not an ideal situation for the energy industry.

Regulatory effects

Fracking is a relatively new technique for oil production. It also has come under intense scrutiny from lawmakers and environmental groups for its potentially harmful side effects. This has prompted the creation of much legislation in Colorado as well as at the federal level to keep the environmental impact of oil production in check. 

As the Associated Press reported, Governor John Hickenlooper and American Petroleum Institute President Jack Gerard met March 31 to discuss the need to maintain a balance  between economic demands and environmental safety in the state's energy industry. As a former petroleum geologist, Hickenlooper brings a unique perspective to the debate surrounding shale oil.

In the course of their meeting, Hickenlooper and Gerard agreed that the petroleum industry must remain a part of Colorado's diverse economy. However, a certain equilibrium must remain to keep everyone's interests in mind. Recently, Hickenlooper was able to secure the passage of legislation that curtailed methane pollution from the state's oil wells. It is hoped that further efforts to promote the strength of the energy industry will also benefit the environment and the health of the population.

For more on the latest in Colorado's economy, talk to the professionals at Vectra Bank.