NEW YORK (The Street) -- The oil sector is in panic. On Wednesday, the Energy Information Agency (EIA) reported another enormous build up in crude oil stockpiles, sending oil prices down another 3% below $45 a barrel. Oil companies, once banking on oil prices they expected to hover at or near $100 a barrel have been forced to take some extreme measures in order to insure their survival.
It's becoming that dire.
At oil prices below $50 a barrel, perhaps as much as 15% of the global supply of oil is uneconomic to take out of the ground. In the United States, that percentage runs far higher, perhaps to 30%. In Canada, it is worse still.
And if you are an oil company where a big percentage of your product is going to lose money in the open market, you have to take extreme measures - the first of which is to cut your spending budget.
These capital expenditures (capex) represent the money that oil companies use to explore and drill for fresh supplies of oil, as working wells continue to decay at an average rate of 5% a year.
On Thursday, Royal Dutch Shell (RDS.A) became the latest major to slash capex by $15b over three years. ConocoPhilips (COP) - Get ConocoPhillips Report earlier slashed their capex by $2 billion for 2015 alone.
But the big "majors" are the lucky ones. Smaller oil companies focused on US shale oil have even faster decline rates, with some wells losing 80% of their production in the first two years. With an even greater need to keep drilling, big capex reductions will put their entire enterprise at risk. Still, many of them have been forced to make even more extreme cuts than the majors:
They have no choice - the US independent oil companies are forced to play a timed game of "chicken:" Cut expenditures, hunker down and hope that oil prices will rebound quickly enough to save them.
With oil production staying high for at least several more months to come, it is a game that many of them are destined to lose.
This article is commentary by an independent contributor. At the time of publication, the author held a long position Oasis Petroleum.