Fracking, or hydraulic fracturing, is a method of extracting oil from dense rock or sand where traditional drilling is not an option. Due to the nature of fracking, costs are higher than regular oil extraction. With falling oil prices dipping below the highs of recent years, can fracking survive?

What Is Fracking?

Traditionally, oil is extracted from natural underground oil reservoirs. These reservoirs are reached by drilling a deep hole into the earth, and the oil is extracted through oil wells and platforms. When oil is in the ground but not in a liquid reservoir, it has to be extracted through other means.

Oil can exist in many underground conditions. Some formations contain shale, a rocky and dense substance, or oil sands. This type of oil is referred to as shale oil or tight oil.

Extracting shale oil and tight oil requires hydraulic fracturing. The fracking process is complex, but here is a high-level overview of how it works. A drilling team drills into the ground until they reach the shale, which is filled with small fissures. The team then injects a chemical fluid into the fissures at very high pressures, causing the shale below to fracture. The fracturing releases the oil from the sand and rock, allowing the team to extract the oil and natural gas from the ground.

As one would expect, the cost of the equipment, process and cleanup from fracking is higher than drilling into liquid crude oil for extraction.

Oil Price Trends

Oil and natural gas prices fluctuate on a daily basis. These commodities are traded on public markets, such as the NYMEX, and the price rises and falls with supply and demand. As more people in the world own cars and developing countries like China demand more energy, prices are expected to increase.

On the other side of the equation, an increase in supply can push oil prices down. As new sources of oil and gas are discovered and accessed around the world, the total supply increases. In the last year, oil prices have dramatically decreased for a combination of supply and demand reasons. (For more, see: What Determines Oil Prices?)

As of this writing, the current price per barrel of oil is below $60 per barrel. You can see the latest energy and oil prices at Bloomberg.

Breaking Even on Oil Production

As recent as 2011, crude oil was trading at nearly $120 per barrel on the NYMEX. High oil prices sustained until mid-2014, when prices crashed from $100 per barrel down to less than $50. While consumers rejoiced at lower gas prices, oil and gas producers scrambled to stay profitable.

At $120 per barrel, fracking is a very profitable business. At lower prices, companies are forced to weigh the cost of expensive fracking compared to less expensive extraction methods.

The most expensive oil produced in the United States today comes from older wells known as “stripper wells.” These are aging oil and gas wells that only produce a few barrels per day. The maintenance cost on the wells does not decline with oil prices, and these wells become unprofitable around $40 per barrel. Other high-cost oil comes from Canada’s tar sands and the United Kingdom’s North Sea oil fields. Those become unprofitable around $30 per barrel and $50 per barrel respectively.

Fracking is expensive, but still less costly than those mentioned above. Conservative blog Breitbart estimates put the break-even point for fracking at around $25 per barrel. At that price, fracking can sustain another 50% price drop before all fracking ends.

This $25 per barrel figure is much lower than the total cost per barrel more widely published, but there is an important distinction between the estimates that put fracking costs at the $60 per barrel range.

At less than a price point around $60 per barrel, oil and gas companies are less likely to explore and drill for new oil accessible through fracking, but existing operations may still be cash-flow positive. Once the expensive exploration and initial drilling are complete, existing wells can continue to operate and stay cash-flow positive even as prices fall below $60 per barrel. (For more, see: How Fracking Affects Natural Gas Prices.)

Environmental Concerns and Opposition

Oil and gas companies have other costs to deal with when it comes to fracking outside of the direct costs to find, drill and extract. Fracking comes with a negative stigma, and environmental advocates around the world are pressuring government officials and oil companies to end fracking operations completely.

Both sides have strong arguments and quote scientific reasons for and against fracking. Opponents argue that the chemicals used in fracking cause serious health risks to nearby residents, as the chemicals can leak into groundwater used as drinking water. Fracking has also been linked to small earthquakes.

Proponents argue that health and environmental concerns are unproven and that fracking is completely safe. The truth likely lies somewhere in between, but the pressure from communities and government officials leave oil and gas companies with expensive costs for lobbying and permitting that other types of oil and gas extraction do not require. This is an industry-wide effort and not directly linked to oil and gas production costs. (For more, see: Will the EPA Crack Down on "Fracking"?)

The Bottom Line

While falling oil and gas prices have left producers scrambling to cut costs, fracking can survive below $60 per barrel. New exploration and production may decrease, and some higher cost wells have already been shut down. However, fracking as a whole continues to survive, and will do so for the foreseeable future.