Best Days Still Ahead For American Shale Revolution
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.
Views: 3299
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on -
Oil Price Crash Was Not Saudi Arabia’s Fault
By Rakesh Upadhyay Posted on Thu, 10 March 2016 21:35 | 2
Quite simply, the Saudis want to maintain their market share, but their means to control that are dwindling.
The whole internet is jam-packed with analysis portraying Saudi Arabia and OPEC as villains for the oil price collapse. On a closer look, however, the Saudi’s could have taken no reasonable steps to avert this situation. This is a transformational change that will run its full course, and the major oil producing nations will have to accept and learn to live with lower oil prices for the next few years.
Why the Saudi’s are not to blame
The Saudi’s have more or less maintained constant oil production, increasing production only modestly at an average of roughly 1 percent per year.
The last time the Saudi’s reduced production, the only objectives they achieved were higher debt and lower market share. It’s no surprise that this time, they were unenthusiastic about following that same path. Had they resorted to any cuts, it would have ended with them losing market share and revenues—nothing more.
U.S. oil production has almost doubled in the last 10 years
The most significant event of the last decade regarding crude oil has been the rise of U.S. shale oil as a credible and long-lasting competitor to the OPEC. The shale oil boom has led to an almost doubling of production in the U.S. in the last 10 years. Booming oil prices, easy credit, consistently rising demand and improved technological methods of fracking led to the current production rate, which would have increased further had OPEC cut their production.
When it comes to oil, Saudi Arabia has enjoyed an unopposed leadership position for a long time. When that position was threatened by the U.S. shale oil, it was natural for them to attempt to protect their market share. However, like every other industry, leaders tend to be lax, ignoring competition until it’s too late. The same happened here too—most oil producing nations failed to take corrective measures, and they are facing its consequences now.
Where are we heading
If oil prices were to drop to the lower $20s/barrel, the Saudis, Russia and OPEC wouldn’t survive for long. Shale oil would take a hit as well, but would be back in production whenever prices rise again; hence, prices will remain fairly volatile with a mid-point of $50/barrel for the next few years, as forecast by many experts.
The current meeting between the OPEC and Russia, although a smart step, will not lead to a material shift in the demand-supply situation. At best, if a production cut is announced and everyone agrees and adheres to the agreement, it will be years before inventories return to normal and the supply glut dissipates. As most of the oil producing nations require high oil prices to fund their budgets, they will resort to increasing production above their designated quota once oil prices rise above a certain level, which will once again bring the prices down.
Along with that, the shale oil drillers have said that they will increase their production if prices move north of $40/barrel. The Kingdom of Saudi Arabia will have to look at other avenues to generate income to fund its budget deficits and accept the fact that U.S. shale oil is here to stay. U.S. shale oil has transformed the crude oil industry for years to come.
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Permalink Reply by P.G. on
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Hmmm?
Looks like the Saudi's only ace in the hole is if Hillary gets elected and curbs Fracking..huh?
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Permalink Reply by Skip Peel - Mineral Consultant on
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The genie is out of the bottle and no one is putting it back regardless of what is said in a political campaign. Hydraulic fracture stimulation will be adopted across the globe over the next decade wherever there are economic unconventional reserves. I suspect the Saudis know that.
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Permalink Reply by GoRicky on
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On NETFLIX - watch 2 documentaries - 'GasLand' & 'FracNation'. Guess what - there's 100 people hooraying for 'GasLand' to 1 hooraying for 'FracNation'. Out of the 100, 30 don't/won't even pay for their energy. They want and/or need it FREE, but don't want it discovered or generated in their back yard, county, state or country! And really, they couldn't care WHERE ELSE it comes from as long as you don't have to do that (terrible, scary, evil, planet-killing...) phrakkinn. They just want it DELIVERED - free. Many have the attiltude that it BETTER BE free, or somebody's going to pay - dearly.
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How can leep piks - read backwards - comment on hundreds of threads on all shale plays in the U.S. 24 hours a day? DUHH -
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Permalink Reply by Skip Peel - Mineral Consultant on
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I make my living by energy research and analysis.
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Permalink Reply by Ron C on
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Good to see that free market forces will work in our favor in the long run. With an inevitable increase in oil prices, every well not drilled or fracked right now is future money in the bank. The long term, indeed, looks good for America.
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The author overlooks a very important point that is becoming more prominent as each day passes. Witness the recent cancellation (by the BLM and the USFS) of another round of oil and gas leases on tens of thousands of acres in Texas. (1) the professional 'environmentalists', (2) the plants in various federal 'bureaus', 'agencies', 'departments', (3) endless 'departments', 'commissions', 'authorities', 'boards' - infinitum, et ultra - have been piously poisoning the well when it comes to hydraulic fracturing; and now, they openly pursue policies that would stop ALL drilling. They are even after the ability of operators to obtain leases in the first place. If reasonable people remain silent much longer, we will be paying way, way more for the energy the 'government' allows them to have, but it won't be coming from coal, oil or natural gas. It'll be coming from plant-killing solar panels, bird-killing turbines and earthquake-causing geothermal sources, for instance.
The pendulum has already swung WAY to the left, and the momentum is to keep going that way. Obama just got through setting aside another 1.8 million acres, in the form of National Monuments. The BLM is accelerating the leasing and permitting of wind turbines and solar panel sites. Economics has lost its place in reasonable decision-making. It's politics now, baby! MY prediction is less production, even at $50/bbl and/or $4-5 gas. Import, baby, import & just print up and pass around paper - the world will love it - right?
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Permalink Reply by Skip Peel - Mineral Consultant on
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U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF LAND MANAGEMENT
January 20, 2016 Lease Sale
Update – August 26, 2015: Because no new Expressions of Interests were received from industry for parcels in the Las Cruces District Office and the Rio Puerco Field Office, the January 20, 2016, Competitive Oil and Gas Lease Sale has been postponed.
http://www.blm.gov/nm/st/en/prog/energy/oil_and_gas/lease_sale_noti...
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Yep - the industry is giving up on our Federally-Owned Lands, because only ONE Expression of Interest is considered (all others are moot) - but, every robo-made letter or fax PROTEST is presumed sovereign and counted. The liberal government(s) and in-collusion 'environmental' wackos have ALREADY determined part of your future... but as long as the 'juice' keeps coming, what the hey? Right?
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Permalink Reply by Skip Peel - Mineral Consultant on
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The last thing the U.S. E&P segment needs at this point is more leases. They have more than they can drill now. And they hold existing leases for tens of thousands of acres of public lands that have gone unexplored for decades. There are multiple good reason behind "no new expressions of interest" in public land leases in the cited districts.
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