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30% of U.S. Shale Drillers ‘Technically Insolvent’ as Analyst Places Economic Recovery Three to Five Years Away

Nearly one-third of shale oil and gas drillers in the United States are “technically insolvent” at today’s oil prices, as crashing demand drives the industry into a period of “great compression” that could last for years, according to an analysis released this week by management consulting firm Deloitte.

And the U.S. industry is a big enough player on the world scene that the trend could produce a “domino effect” for the global fossil industry, E&E News reports, in a post republished by the Institute for Energy Economics and Financial Analysis.

“Before COVID-19 hit, oil demand worldwide was already trending downward and the market had shown some instability, mostly due to concerns over climate change,” E&E writes, citing Duane Dickson, a Deloitte vice-chair who and oil, gas and chemicals leader. Now, “with the coronavirus upending global supply chains and forcing many industries into telecommuting, oil demand is not expected to return to pre-pandemic levels ‘anytime soon’,” the publication adds, citing the report.

“We see at least three to five years before a recovery of all the major markets occurs,” Dickson said.

In the meantime, Bloomberg reports that public finances have taken a nasty shock in New Mexico, just months after the United States’ third-biggest oil producer adopted its biggest budget ever. That fiscal confidence was based on “an oil boom that made up 40% of the state’s revenues in 2019,” the news agency writes. “Now that plan has been slashed by more than US$600 million, affecting everything from pay raises for state workers to a program designed to provide free community college to state residents.”

The story is not unique. “Oil-producing states across the U.S. are facing a double whammy, with both drilling and overall consumer spending cut back by the pandemic,” Bloomberg says. But New Mexico “stands as exhibit A of this boom-to-bust dynamic, with the state’s revenue forecasts plunging and more than 4,600 workers in mining, most of which is oil and gas-related, claiming unemployment insurance in the week ended June 13.”

“We were just starting to stand on two legs,” said University of New Mexico finance professor Reilly White. “All of that stuff that passed, and that we were expecting this year, oil was a big part of that. The rug has just been swept out from under us.”