By Mark Perry

These days the oil market is a real street brawl.

Filling up at the pump has turned into highway robbery. The average cost of a gallon of gasoline in the U.S. is below $1.80 — the lowest in almost a decade. Oil prices — hovering at $30 a barrel for the last few months — are wreaking havoc on producers around the world, but the pain has been particularly sharp here in the U.S.

Many of our oil companies — the very companies that helped launch the shale revolution — are teetering on bankruptcy. Others that are somewhat better off are trying to maintain investor confidence by promising to more or less hibernate.

For example, Whiting Petroleum and Continental Resources, the two largest producers in North Dakota’s prolific Bakken shale, have decided not to frack any new wells for the foreseeable future. Survival in this market means cutting investment until oil prices begin to rebound.

Does this grim news mean that the gains of the shale revolution — increased U.S. energy security, stronger economic growth and a less powerful OPEC — will be lost? Far from it.

It may be hard to see through the storm, but the U.S. shale industry’s best days are likely still ahead.

Although Saudi Arabia still plays a central role in the global oil marketplace, America’s shale producers have broken OPEC’s ability to manipulate the market as it has since the 1970s.

In 2008, U.S. crude oil production had fallen to only 5 million barrels a day, a drop of almost 50% from the peak production of 9.6 million in 1970 and down to the lowest level of domestic crude output in more than 60 years, going all the way back to 1946 (see chart above). But then the revolutionary drilling technologies of hydraulic fracturing and horizontal drilling sparked the great American shale revolution, and the abundance of domestic shale oil quickly reversed the 36-year decline in U.S. output in only seven years.

Thanks to the bonanza of shale resources in states like Texas and North Dakota, U.S. crude oil output last year surged to a near-record 9.34 million barrels a day as “Saudi America” re-emerged as a world energy superpower.

In response, the International Energy Agency recently said, “In 2016, we are living in perhaps the first truly free oil market we have seen since the pioneering days of the industry.”

Producers here and overseas are pumping out as much oil as they can to maintain market share. As the Saudis have slowly recognized, any attempt to cut production and prop up prices would only allow rivals — namely shale producers — to pump more, fill the void in the market and then push prices back down.

This is, at least in the short term, fantastic news for consumers. Oil will likely stay cheap, and motorists are going to continue to benefit from significant savings at the pump.

For shale producers, today’s dirt-cheap oil prices are transforming the business into a leaner, more nimble and more resilient industry. Many companies that ramped up operations and built business models around $100-per-barrel oil are now remaking themselves into operators capable of not only surviving but growing with oil at $50 a barrel or even less.

America’s shale oil industry, though down for now, has a pretty good model for recovery — domestic shale-gas production. After natural gas prices collapsed in 2008 by more than 75%, shale-gas drillers adopted more efficient methods of drilling and extracting shale gas. Since then, natural gas production has increased and drilling rig productivity has grown by leaps and bounds.

New gas wells in the Marcellus shale are a case in point. A newly drilled well in February 2014 produced, on average, 6.3 million cubic feet of natural gas per day. In February of this year, productivity for newly drilled gas wells rose to more than 9 million cubic feet of gas per day.

Gas drillers have learned how to produce more with less. They get more gas out of each rig, drill faster and smarter, and have become competitive even in a low-price environment. Oil producers are now following in their footsteps.

Make no mistake, the shale revolution is here to stay. The vast shale resources unlocked over the past decade aren’t going to disappear, no matter how much the Saudis wish they would. American shale producers have proven capable of rapid and often unexpected technological innovation and problem-solving.

As OPEC has already found out, it’s a fool’s errand to bet against America’s petropreneurs.

Perry is a scholar at the American Enterprise Institute and professor of finance and business economics at the School of Management, University of Michigan-Flint.

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The federal government has provided the O&G industry with below market bonuses and royalties for public land leases for decades. The industry has failed to drill a lot of that acreage.  Without production there is little revenue for the public coffers.  I'd like to see a lot more development of public lands but it's not a priority for the industry.  There are isolated instances where companies choose not to jump through the BLM hoops but they are insignificant in scope. 

Bonuses and royalties are based on the perception of "opportunity", period. I have drilled and operated on BLM lands, and I would testify before Congress that the delays, additional (initial and continuing) costs, complications, liabilities, double-talk, multi-agency turf-fighting, environmental complications -etc... do not amount to "below market" provisions... 

Considering the current state of the industry, BLM regs are pretty low on the list of issues. 

Who is piks (read backwards), anyway?  How can he stay up 24 hours a day, responding to every formation, zone and market condition - 7 days a week, every week of the year, year after year? How can he make a living?

That's exactly how I make my living.  And although I'm not at it 24/7 I spend a lot of hours each work day reading articles and reports and performing database research.

Not really going to get involved, and this is a "left-handed compliment", but I'm not sure what difference it makes if Mr. Peel does stay up 24/7 responding to post on this forum.  It's basically a conversation setting, not much more than a fancy new way of hanging out at the barber shop talking about the town's ups and downs. I would think it's Mr. Peel's choice to determine how much time he spends researching and responding.

I would just recommend that anyone with a serious decision to make do your own due diligence on info from any web site. If you don't have a serious decision to make, then just enjoy the conversation for what it is, conversation. 

GoRicky,

  I would hold Skip's reputation up to any of the other contributors on the site.  He has been honest and helpful to many.  Your post appears tedious and juvenile. Seriously, "who is piks"?  Ask anyone who has been on the site for long, knows he does his best to be informative.  Like many in the past, he works in the industry but this does not prevent him from dispensing useful information.  We can all have different opinions.  I see no reason to attack someone who has an opposing view.

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