An International Perspective on US Oil and Gas
The US is the world’s largest oil and gas consumer and now the world’s
largest producer. Old rules no longer apply.
The US has always been the world’s largest oil and gas consumer but its role as a producer has changed over time. From 1970 through 2008, US oil production declined by almost half, from over nine million barrels to five million barrels a day, all while US oil consumption increased.
This imbalance made the US more and more dependent on imported oil and gas. Geopolitical events that threatened international oil and gas production led to price spikes, out of fear that the import demand would not be met. OPEC, through supply increases and decreases, largely dictated international oil prices.
In the early 2000s, the talk was about how the world’s daily oil production of oil had peaked. Fearing domestic natural gas demands would not be met, companies invested billions to build LNG import facilities.
The US “shale revolution” then changed the game. From 2005 through 2017, our annual gas production increased almost 50 percent from 18 TCF to 26.8 TCF. Then, 2008 through 2017, US annual oil production increased almost 90 percent—from 1.8 to 3.4 billion barrels.
No longer were oil and gas imports as necessary to meet our demand. To alleviate the sudden oversupply issues, companies here converted LNG import facilities to export facilities, with the government making it easier to export oil and gas.
Make no mistake, however. Oil and gas prices are fundamentally driven by supply and demand. While the US drastically increased production earlier this decade, OPEC and Russia refused to decrease their production and cede market share to US producers. Beginning in summer 2014, oil prices plummeted from over $100 to $30 per barrel.
Something needed to happen on the supply or demand side, or both, to raise the price of oil. Would demand increase? Yes, but not substantially or fast enough to lead to a quick recovery.
Would US producers slow their production? Yes, to an extent. The US is unique in that, with the exception of state and federal lands, private individuals own their minerals and contract directly with exploration companies to produce them. Unlike most countries, our government does not own most of the minerals, nor does it have the power to order an immediate production curtailment. That decision rests with the operators. Whether to pay creditors or show its investors constantly increasing production, they face significant pressures to keep producing more and drill wells to hold leases.
Would OPEC and Russia curtail production? Yes, eventually, once the price got very low. Some believe OPEC waited so long in order to hurt US shale producers, because we require higher oil and gas prices to be profitable. Perhaps that is true. Many producers did go bankrupt, but those that survived also learned how to efficiently lower their production costs.
Ultimately, this price recovery resulted in increased demand, OPEC and Russia production cuts, and US drilling cutbacks. But with the price recovery, we’re again seeing a lot of drilling in shale fields, especially the Permian Basin.
We are now the world’s swing producer—quickly increasing production when prices are high and decreasing production when prices are low. While the future is difficult to predict, it’s important to recognize that because of the shale revolution, US producers collectively now have a major impact on global oil and gas supplies, and, therefore, prices.
Published FW Inc magazine, 2018. Click here to view the article.