Wolfram: American oil production is still strong
With crude oil prices down about $45 per barrel from a year ago, one might think that U.S. energy production would be in a state of decline. However, U.S. production continues on its upward path.
Over the past four weeks, crude oil production has exceeded 9.5 million barrels per day, with last week’s production only surpassed by the prior week. To give some perspective, production three years ago was less than 6 million barrels per day.
The shale revolution made possible by the advancement in horizontal drilling has changed the landscape of U.S. oil production by drastically lowering the cost of producing oil. In economic terms, there has been a large shift in the supply curve to the right resulting in falling prices along with increased output.
It is easy to remember oil prices in excess of $100 per barrel, but it is useful to remember that oil was less than $50 per barrel in April of 2009, so the $60 range is not an anomaly and can sustain U.S. production well in excess of 9 million barrels per day. This is both due to significant reductions in production costs and to the fact that the technological advances from fracking and horizontal drilling have opened up areas to drilling where it was not thought to be useful or feasible at current oil prices. For example, the U.S. Geological Survey estimates the Bakken formation in North Dakota and Montana holds 95 times more reserves than it estimated 20 years ago.
We can expect strong U.S. crude oil production to continue to be a significant factor in the country’s economic growth. Bloomberg News recently reported that the U.S. has passed Russia as the world’s largest producer of oil and natural gas. The Energy Information Agency does forecast a slight decline in U.S. production through next February, but production is still predicted to remain well above 9 million barrels per day, and will return to record levels in December when new drilling projects come into operation in the Gulf of Mexico.
While there has been a reduction in oil rigs by about 60 percent since October of 2014, producers have been finishing wells that were planned and started prior to the fall in oil prices. These wells tend to have a higher rate of production than existing wells, thus the increase in U.S. production despite a smaller number of oil rigs.
This large change in domestic production has occurred in the face of an effective ban on crude oil exports.
The export ban, passed in response to the 1973 Arab oil embargo, effectively acts as a constraint on our domestic oil industry. The major upsurge in domestic production has added to Gross Domestic Product by reducing imports from more than 10 million barrels per day in October of 2008 to about 7.5 million barrels per day.
Domestic production would expand further if oil could be exported, since the export ban results in a difference of more than $3 per barrel between the domestic price and the world price. As U.S. oil production continues to grow, we would move closer to energy independence.
Gary Wolfram is William Simon professor of economics at Hillsdale College.