Oil prices have collapsed, drilling rigs are being idled, and energy companies are cutting jobs. All signs suggest a slowdown in the US oil industry – and yet output continues to grow, reaching highs not seen since Richard Nixon occupied the Oval Office.
What gives? In short, there’s more to the story than what’s in the latest weekly numbers on job cuts or stacked rigs. Falling rig counts and layoffs don’t halt current production, or even production set to begin in the near future. What’s more, companies are getting more bang for their buck, redoubling on the most productive oil wells and finding new drilling efficiencies. But if prices remain low or continue to drop, eventually the drag of cheap oil is likely to catch up with the industry.
“I’m not surprised we haven't seen production drop. Oil production lags oil drilling,” says Severin Borenstein, a professor at University of California’s Haas School of Business in Berkeley, adding that rig counts didn’t begin declining until months into the price drop. “I am surprised we’ve continued to see increases in production, and I think that says something about how effective the technology is.”
US crude output hit 9.23 million barrels per day in December, according to US Energy Information Administration data, more than any time since 1973. Production today is more than double the 3.98 million barrels the US extracted per day in September 2008, when the financial crisis threw oil prices and production – not to mention the rest of the economy – into a tailspin.
That production boom is partly what has pushed oil prices down more than 50 percent since last June. Over time, low prices could threaten the shale boom, analysts say, since shale producers require higher prices to turn a profit. So far production hasn’t dipped, though, despite the fact that oil prices remain stubbornly low, particularly in the US. In fact, even with oil at $50 a barrel for the first half of this year, EIA expects crude production to rise from 8.6 million barrels per day in 2014 to 9.3 million barrels per day in 2015 and 9.5 million in 2016.
Many have turned to rig count numbers as prices have fallen, hoping the number of drilling rigs actively seeking or developing oil will quantify the impact low oil prices are having on the US boom. But those numbers are better predictors of production months or years down the road, Mr. Borenstein said in a telephone interview Tuesday, because it takes a while for the lack of new drilling to show up in new production data.
In offshore drilling, the lag time is especially long. Case in point: The US Gulf of Mexico, where the last couple years’ investments will translate into increased oil production for the next two years, according to EIA – all despite the current low oil prices. Gulf output is expected to hit 1.52 million barrels per day in 2015 and 1.61 million barrels per day in 2016.
Domestic production in the US now rivals both Saudi Arabia and Russia’s oil output, thanks in large part to breakthroughs in fracking and horizontal drilling which, over the last several years, have helped US producers tap previously unexploited shale oil reserves. That boom in US oil supply, coupled with soft demand around the world, sent prices tumbling last year.
Saudi Arabia, the world’s largest oil exporter, let oil prices fall to test the level at which shale production was profitable, Borenstein says, and “the answer has been pretty disappointing for them.”
That’s because shale oil production has proven resilient. The low price environment has encouraged producers to innovate to make a profit in shale plays, from North Dakota’s Bakken formation to the Eagle Ford in Texas.
If oil remains cheap, “there’ll be technology gains and efficiency improvements so that North American shale can be developed more effectively at lower prices still,” according to Jason Kenney, a Banco Santander SA analyst, in an interview with Bloomberg this week.
Regardless of when prices rise again, the current environment has given the market a better sense of the price range at which shale oil is profitable.
“When the drop started, the media was reporting that at $70 a barrel we’d see significant cutbacks [in production],” Borenstein says. “No one is quoting that number anymore.”