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OPEC Won’t Cut Drilling, and Prices Plunge 5%

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By CLIFFORD KRAUSSA version of this article appears in print on December 8, 2015, on page B1 of the New York edition

HOUSTON — Crude oil prices slid a further 5 percent on Monday to fall to their lowest levels since the 2009 global recession, pummeled by the fading chance that Saudi Arabia would cut production to halt the commodity’s yearlong slide.

In only 16 months global oil prices have collapsed from over $110 a barrel to less than half that, and the oil industry in the United States and around the world is reeling from its worst crisis since the late 1990s. On Monday, the American benchmark broke the $38-a-barrel mark, a price that makes drilling and completing wells a losing proposition in almost all oil fields around the country.

Oil stocks were sent tumbling, along with the rest of the market, as the price plunge put additional pressure on their finances. Kinder Morgan, the pipeline giant, said on Friday that it was reviewing its dividend. Shares of independent oil companies like Apache and ConocoPhillips fell by more than 3 percent on Monday.

“It’s another damaging blow to the U.S. oil industry,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Texas oil company. “The rig count will continue to decline, the production decline will accelerate and capital spending plans will be curtailed further, as will employment.”

A variety of factors is behind the price drop, analysts say, including the surge in American and Iraqi oil production in recent years and a slowing in demand growth from China and other developing countries.

But it was the decision by the Organization of the Petroleum Exporting Countries, led by Saudi Arabia and a few Persian Gulf allies, in November 2014 not to cut production to shore up prices as it often had in the past, that sent prices into a collapse.

Last week, traders and oil executives held scant hopes that maybe Saudi Arabia would listen to the urgings of several OPEC nations like Venezuela, Iran, Ecuador and Algeria to cut production, and that maybe Russia and some other non-OPEC producers would join in the effort. But those hopes were dashed on Friday when OPEC refused to tinker with its output, which is now at near-record levels.

The refusal to cut production left American oil executives expressing concern about the future of the industry.

“They can continue to decimate our industry and it will take years to come back,” said Steve J. McCoy, director of business development for Latshaw Drilling, a drilling contractor based in Oklahoma. “They are doing their best to keep America from being energy self-sufficient or to have the ability to export.”

The Saudis’ actions are having the effect of forcing companies to reduce their shale production in the United States, which though expensive, has nearly doubled American oil output in recent years. The shale revolution, a relatively recent phenomenon, also threatens to increase production in many other countries that can eventually drill into their own hard rocks.

Several smaller American companies with higher debt loads have missed bond payments or been forced into bankruptcy. Domestic production has so far declined modestly because producers have been able to drill more efficiently and because their service companies have been forced to lower their prices, although output is expected to drop faster in 2016.

In the meantime, offshore oil production in the Gulf of Mexico continues to rebound from the 2010 BP oil spill and the federal drilling moratorium that followed.

An estimated 250,000 oil and gas workers have lost their jobs over the last year worldwide. In Texas, the biggest American producer, at least 50,000 jobs have been lost.

OPEC officials said that before they made any decision about future production cuts, they wanted to see the impact on global markets of new barrels from Iran — expected to be as many as 500,000 a day by the second half of 2016 — as Tehran complies with the recent nuclear deal. They also suggested that Saudi Arabia might be willing to cut as long as other major producers were willing to do the same.

Many oil analysts have compared the Saudi strategy to a game of chicken to see which large producers would blink first. But the strategy holds risks for Saudi Arabia, which relies on oil for 85 percent of its exports and much of its government financing.

Though the Saudis continue to have hefty reserves, the International Monetary Fund has warned that they could run out of cash in five years because of the reduced revenues and high social spending they rely on to keep domestic peace.

“We believe that the current OPEC strategy (non-strategy) leaves a significant portion of the cartel at risk for crisis in 2016,” according to a recent RBC Capital Markets report. “Venezuela may even be the first to reach such an inflection point.”



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