U.S. oil production has returned to its record high point, 47 years after the previous peak during the final days of the last Texas oil boom, as the shale revolution that was temporarily set back by low crude prices has reignited.
The government’s Energy Information Administration estimated on Jan. 31 that U.S. output was running at just under 10.04 million barrels per day (MMbbl/d) last November, fractionally below the previous record set in November 1970.
Soaring output from shale wells has put the U.S. on course to overtake Saudi Arabia and Russia to become the world’s largest crude producer, shaking up oil markets and the geopolitics of energy.
The spike in U.S. production over the past decade has been a remarkable reversal for a country that for decades was the world’s largest importer of crude, and seemed headed for a future reliant on foreign supplies. But the new surge puts U.S. output at more than double its low point of about 5 MMbbl/d in 2008.
The additional crude supply released by the shale oil boom has helped to hold down prices, benefiting consumers worldwide.
It has boosted the U.S. economy, creating tens of thousands of jobs, bolstered its energy security, created new international relationships, and given Washington new freedom to use sanctions as a tool for strategic influence.
“For decades the only question was how fast are U.S. oil imports going to rise,” said Daniel Yergin, vice-chairman of IHS Markit. “Now global oil markets have been put in a bottle and shaken up, and new patterns are emerging.”
The U.S. remains a net oil importer, but its purchases from other countries have fallen sharply. Net imports of crude and petroleum products were down to 2.5 MMbbl/d by last October, from a peak of 12.9 MMbbl/d in 2006.
Restrictions on crude oil exports were lifted at the end of 2015, and the US has also been selling growing volumes around the world. In the first nine months of last year it exported about 50 MMbbl of crude to China, 20 MMbbl to Britain and 7 MMbbl to India.
After a steady decline since the mid-1980s, U.S. production began to pick up in 2009. Independent companies such as EOG Resources began applying the techniques of horizontal drilling and hydraulic fracturing, already successfully deployed in shale gas reserves, to produce oil.
The industry took a blow when prices started to slump in 2014 after Opec decided not to accommodate rising US supply by cutting its own output. Activity slowed sharply, and dozens of companies went into bankruptcy.
But U.S. capital markets remained supportive of the industry, providing debt and equity financing to keep afloat most of the small and mid-sized companies that are the bulk of the shale sector.
Producers cut costs and improved efficiency, pushing the technology forward with refinements such as drilling longer wells and focusing fracturing more precisely on oil-bearing rocks. Productivity soared.
In the Permian Basin of Texas and New Mexico, four years ago there were 196 b/d of oil being produced for every active drilling rig, according to the EIA. That number has more than tripled to 628 b/d per rig.
The U.S. industry is producing record volumes of both oil and gas, while employing only about 77% of the workforce it had at its peak in September 2014.
Unlike conventional oil projects, which can take many years to come into production, shale wells can be drilled in a couple of weeks and cost a few million dollars each, meaning the industry can respond more rapidly to market fluctuations.
Shale producers responded swiftly by putting more rigs to work as oil prices rose last year, and US oil production has responded to changes in drilling activity with a lag of about six months.
Industry plans suggest there is still plenty more growth to come. ExxonMobil this week announced plans to increase its shale oil production in the Permian Basin fivefold over the next eight years, to 500,000 bbl/d.
The surge in U.S. output has squeezed the finances of other producers around the world, contributing to the difficulties faced by oil-dependent economies such as Venezuela.
“Shale has constrained OPEC’s ability to manipulate oil prices,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “It’s a new and challenging dynamic for Opec countries to adjust to.”
Some analysts believe shale will put a rough ceiling on prices, with extra supply coming on to ease any tightness in the market.
However, the industry is only a decade old and its full implications have yet to play out. Higher production will help cushion the impact of an oil price shock on the U.S., but does not remove it completely. Lower prices caused by shale have contributed to strong growth in demand for oil, adding to greenhouse gas emissions.
Shale could end up increasing oil price volatility by deterring investment in longer-term oil projects. Investment in oil and gas production plunged 44% between 2014 and 2016, according to the International Energy Agency.
Robert McNally of Rapidan Energy Group, a market analysis firm, said: “If demand keeps growing, we’re going to need a lot more oil supply in 2020-2021. And we might not have it because of all the projects that have been delayed and cancelled on account of shale.”
“It’s a new game, and the market is still trying to figure out the rules,” Yergin said.
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