The unusually warm and dry weather across more than half of the United States has resulted in one of the worst droughts in U.S. history. Much has been made about how the crisis will affect crops and cattle, but it could also alter oil production and prices.
With nearly 64% of the contiguous United States in a drought, the highest percentage since the U.S. Drought Monitor began recording such data in 2000, the economic repercussions are searing.
To date, 2012 has already surpassed 2011’s $12 billion in drought losses, and this year is on pace to rival the droughts of 1980 and 1988, which endured losses worth a current value of $56 billion and $78 billion, respectively.
According to 70 years’ worth of data studied by the National Center for Atmospheric Research, weather (from heat waves to cold spells to droughts) can cause up to a 1.7% rise or fall each year in the U.S. economy’s gross domestic product.
Farmers and agricultural companies have been voicing concerns, now oil and gas companies are speaking up.
With farmers trying to hold on to every ounce of water they find, oil companies don’t know how they will get the water needed to drill into their oil fields.
“Water is the key to unlocking oil and gas. We take it for granted,” in the U.S., said Chris Faulkner, president and chief executive officer of Breitling Oil & Gas, which has numerous operations in several of the new shale regions.
Drought Effect Felt Across Oil Industry
The severe drought underscores how reliant modern U.S. energy development has become on water.
West Texas, North Dakota, Kansas, Colorado and Pennsylvania, all under drought conditions and all part of the fresh boom in North American energy production, are feeling the pressure from the lack of water and the relentless sweltering heat.
Those areas have been enjoying an oil rush thanks to fracking, the contentious and modern practice that permits oil and natural gas to flow by cracking shale rock with sand, chemicals and water-lots and lots of water.
According to CNN Money, each shale well requires 2-12 million gallons of water to frack.
Faulkner told CNN that in Kansas, where much of the industry’s water comes from wells owned by farmers who used to sell him water for about 35 cents a barrel, water is going for more than 75 cents a barrel. The result is that some 10%-12% of wells Breitling planned on fracking have been placed on hold.
“As the drought continues,” Faulkner added, “those numbers will rise.”
Faulkner said officials in two Pennsylvania counties have stopped issuing permits for oil companies to draw water from rivers, forcing the companies to find new hydration sources. Faulkner said he has to go as far as 75 miles away to find water for his drill sites.
While oil from shale rock is just a small portion of overall U.S. oil production, it is a growing and important part in new U.S. oil supply growth. The drought has highlighted how exposed that production is to disruptions in the availability of water.
Neal Dingman, an analyst at SunTrust Robinson Humphrey in Houston, told CNN that new oil wells from the small-to-mid-sized companies that Humphrey follows are expected to shrivel by 5%.
Also compounding the wretchedness of the drought is water-stricken canals and rivers. Low water levels could make some energy terminal routes impassable if water levels become too low.
Oil prices could rise in some areas as a result if it becomes difficult to get gas to these regions.
Our Resource Shortage Will Hit More than the Oil Market
It turns out America isn’t nearing the days of energy independence, but is instead quickly approaching a hidden crisis. That’s because of a startling, undeniable pattern that has emerged and is going completely unreported.
We were so interested in this developing crisis that we enlisted an Emmy and Sundance Award-winning documentary filmmaker to follow a team of scientists, economists, and energy analysts on an investigation to expose this dangerous pattern.
By Diane Alter, Contributing Writer, Money Morning