NOEL KING, HOST:
All right. The S&P 500 hit another record high this week. It's up almost 25% for the year. But - but - the S&P is index of oil and gas stocks is down more than 20%. It's a sign of trouble for this country's oil industry. Darius Rafieyan has the story.
DARIUS RAFIEYAN, BYLINE: Some of the most successful companies in the oil business are household names - think Exxon Mobil or Chevron. But the boom in shale drilling that has helped turn the U.S. into the world's largest oil producer, that has been driven by smaller, independent operators, companies that have pushed the limits of drilling technology and taken big risks on unproven oil fields. Today, shale accounts for about two-thirds of U.S. oil production and nearly all of the industry's growth. But many of the companies that made that growth possible are now struggling to stay afloat. David Deckelbaum, an analyst at investment bank Cowen, says that has a lot to do with the business model of U.S. shale.
DAVID DECKELBAUM: This is an industry that, you know, for every dollar that they brought in, they would spend two.
RAFIEYAN: For years, operators focused on drilling lots of new wells very fast, prioritizing explosive growth over profitability. And until now, they've been able to rely on deep-pocketed investors who were willing to pour fresh capital into the industry despite years of lackluster returns. It's a story that may be familiar to anyone who's been following the tech industry in recent years. Deckelbaum compares it to a kind of prospector mentality.
DECKELBAUM: There's a lot of romance, I think, because there's always this idea of this brand-new play that's going to have billions of barrels of upside. And if, you know, you can just get in early, then it'll pay off in the long run.
RAFIEYAN: Of course, oil has always been a boom-and-bust industry. In 2014, for instance, a catastrophic price crash left the industry reeling. But even then, billions in new investment flowed into U.S. shale. Today, shrinking global demand for oil is driving the price down once again. What's different this time around? Investors no longer seem willing to write the industry a blank check.
DECKELBAUM: I think now you've seen a lot of pressure of, we want you to be a real business. Your cost structure is too high. You have too much debt. I'm not funding your drilling anymore with external capital. You have to live within your own means.
RAFIEYAN: Without access to fresh cash, many producers are pulling back on new exploration. The number of rigs drilling for new oil is at its lowest point in two years. That's bad news for people like Ron Fountain, who works on a drilling rig in the Bakken shale of North Dakota. He thinks back to a few years ago when the price of oil was over $100 a barrel, and companies were drilling with abandon.
RON FOUNTAIN: That's when we were still booming. There was rigs coming out every month. We couldn't keep up, there was so much work going on.
RAFIEYAN: Today, though, with more and more rigs sitting idle, life has become uncertain for Fountain and his fellow drillers.
FOUNTAIN: We went from having, you know, a three-year contract to well-to-well contracts, which means you drill one hole. And if you did a good job, then they'll give you another one, or they drop you, and you've got to figure it out from there.
RAFIEYAN: And he's not the only one feeling the pinch. Halliburton, one of the biggest players in U.S. shale drilling, has laid off nearly 3,000 workers. In the Permian Basin, the country's most prolific oil field, employment has almost completely stalled out. That's after growing more than 11% last year. Meanwhile, many of the smaller producers who loaded up on debt are struggling to pay it back, leading to a wave of bankruptcies, more than three dozen so far this year.
All of this is adding up to slower oil output. Data from the Department of Energy shows that production was flat in the first half of 2019 after growing more than 20% last year. In theory, as production slows and supply shrinks, the price of oil should go back up, which could provide a much-needed boost. The question, says Ron Fountain, is how many companies will be able to survive until then.
FOUNTAIN: I think, as an industry, we're going to be OK. But I think there's a lot of people that are kind of holding their breath.
RAFIEYAN: Darius Rafieyan, NPR News, Washington.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.