|The oil industry has seen sweeping changes over the past few years, with production rising rapidly (particularly in Texas).
Talk has begun as to whether we can surpass previous records, make real progress toward energy independence, and sustain the current level of activity. Here’s my take on these questions.
Oil production is driven by three primary factors: prices, geology, and the technology available for exploration and recovery. Oil prices vary in response to supply and demand. Demand fluctuates to some extent with economic conditions and development, but is relatively stable. Supply is influenced by politics, the OPEC cartel, natural disasters, weather phenomena, and other conditions we can neither control nor perfectly predict. As I’ve discussed in recent columns, however, it looks like oil prices will be staying high for a while, with countervailing pressures keeping prices bouncing around in a fairly narrow range (though this could certainly change). With prices at these levels, it makes economic sense to continue to drill and produce, pushing up totals.
Geology obviously doesn’t change. Aging fields had been contributing to shrinking production for decades (until the recent surge). In the United States, oil production peaked in 1970 at 3.5 billion barrels coming out of U.S. fields. Even with the extremely high prices with the supply shocks during the 1970s and 1980s, total production has never again reached that level. The low point in annual U.S. production was in 2008, at 1.8 trillion barrels.
Over the past few years, however, production has again begun to rise, thanks to the third major driver of production: technology. With the development of hydraulic fracturing and other innovative recovery methods, oil in unconventional formations has become technologically feasible to produce. There are also better ways to find oil such as 3-D seismic mapping. Annual total production from US wells began to rise in 2009, and the pace of growth is accelerating. In 2012, total U.S. production was almost 2.4 trillion barrels. If you take the latest monthly data (October 2013) and annualize it, production is on pace for 2.8 trillion barrels. Given expected production growth, we could reach and surpass prior peaks sometime in the next couple of years.
Texas annual production peaked in 1972 at almost 1.3 trillion barrels. In 2012, it was just over half a trillion barrels. Even so, Texas production made up all of the ground lost in two decades in just one year. Much of the “easy oil” is long gone. In the early 1970s (and even during part of the 1950s), wells were producing more than21 barrels per day on average, compared to less than nine in 2012 (still better than the averages just a few years ago). We’ll have to have some major technological breakthroughs to overcome this basic geologic fact.
As to energy independence, we are making some strides. True energy independence in the strictest application of the term is a very lofty goal which is probably far beyond what is practical or necessary. Energy security, where we have the domestic resources and sources of supply from allies whose interests closely align with our own (such as Canada) to meet essential needs, is an objective worth pursuing. The United States imports a substantial proportion of the oil we need, but the balance is subtly shifting. With continued development of fields across America and construction of pipelines such as the Keystone, we are becoming less vulnerable.
With prices likely to remain at relatively high levels, it looks like the oil surge will be sticking around for a while. Unlike during some points in the past, demand and supply are relatively stable. There’s not an embargo or war or cartel artificially inflating prices. Certainly, there will be cycles, but the prospects of a notable, protracted downturn any time soon appear to be remote at present.
While 2014 might not be the year we reach all-time-high oil production, I do hope it’s a good year for you and your business. There are signs that this could be a better year for the economy and job seekers, with Texas leading the way. We at The Perryman Group wish you all the best in the New Year.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.