Rule believes production could take years to drop off substantially as the period from 2008-14 was so profitable it left many companies with ample supplies of cash and assets.

The oil and gas industry - like the mining industry - might deplete its capital to keep its production going, even if the production was uneconomic, he said.

"The industry might produce down to break even, or even below that in order to generate the cash to keep the lights on and - importantly - to pay management salaries," Rule said.

This is not without precedent in the energy sector, as Rule recalled that the natural gas industry in 1983 was selling its product below the cost of production, and continued to deplete capital reserves for seven years until 1989.

However, Rule said the sector might not deplete its capital completely, as a rebound in the price of oil was still possible, with low prices potentially stoking demand enough to take the price to higher levels.

"In developed economies that use a lot of energy, such as Western Europe, the US, and Japan, the decline in oil prices acts like a tax cut. It increases the disposable income of consumers, which lead to increased economic activity," Rule said.

"A lower oil price might stimulate demand in the near term, because people have more money in their jeans thanks to lower gasoline and energy costs. This begins to seed the overall economy for a recovery.

"It hastens the situation where lower prices take care of themselves."

De-capitalisation occurs because profit margins go down, leaving less cash on company balance sheets, while at the same time capital providers are less willing to put money into the sector.

One of the most common means of financing a new well is to promise future proceeds from the well to the creditor until debt has been repaid.

At a high oil price, operators could pay back their loans quickly and keep a greater portion of the proceeds for themselves. At a lower oil price, they had to wait longer until they are able to keep the cash flows for themselves, Rule said.

"What looked like eight-month payouts to creditors at $90 per barrel are now two-and-a-half-year pay-outs," Rule said.

This leaves oil field debt "locked into" projects much longer than expected, because it must be paid back from diminished cash flows. The total amount of capital that could be affected by longer payback times is estimated at around $US500 billion.

An alternative means of financing is to issue new shares - but share prices among junior oil producers have plummeted.

The Dow Jones North America Select Junior Oil Index, which tracks small oil stocks in the US and Canada, is down over 40% in the six months ending Monday this week.

This means that raising cash by issuing new shares will be greatly dilutive and potentially harm existing shareholders.

In the very near term, though, Rule believes the oil price decline will also weigh on the economy.

"Until a few months ago, the sole exception to the overall weak growth in the US was the oil and gas industry where real wages were rising rapidly. That party of course is coming to screeching halt."

However, unlike shale producers in the US that have been over-capitalised, he said government-owned oil companies have been drained of capital over the last decade, including Mexico, Venezuela, Peru, Indonesia, Ecuador, Iran - and possibly Russia - which have diverted significant amounts of cash flows from their oil and gas industries into more politically expedient social programs, starving their oil and gas industries.

Rule warned that the oil price will have deeper consequences for these countries beyond hurting their national oil companies.

"Given how these countries are run, with a significant portion of national budgets coming from national oil industries, it is unlikely that they will be able to balance budgets at $55/bbl when they were already in deficits at $90/bbl," he said."