Over the last five years, Americans have enjoyed consistently low oil and gas prices thanks to a massive uptick in the production of oil and gas produced from shale in the U.S. This industry growth has enabled the country to play an increasingly important role in global and domestic energy markets. But how long will these low prices and high productivity levels last? The answer is of great importance for matters like the economy and national security – not to mention the price you pay for gas.
If you look at our current production levels, you might think the good times will last for quite a while. The U.S. is now considered by some to be the world’s “swing producer” of shale oil and gas. In North Dakota’s Williston tight oil basin, crude oil production grew from 98,000 barrels a day in 2005 to 1,174,000 barrels a day in 2015. As a result, the U.S. power sector has drastically increased its reliance on domestically produced natural gas, especially from shale.
A lot of credit for this industry growth is going to technology. Many people say that the technology used to get the resources out of the rock – and the subsequent technology developments – are to thank for the gains we’ve seen in well productivity. But how much can we really link to technology versus the location of the wells?
Looking at this question in a recent study, we found that the oil and gas business is just like real estate. It’s all about location, location, location. Where you drill matters, but in the shale business it matters even more.
We looked at data from the Williston Basin during a 42-month period starting in 2012 to quantify the extent to which improvements in well productivity have been associated with technology as opposed to changes in development location. Using five different regression models, we found that the impact on technology on well productivity is greatly over-estimated. In fact, our study showed that the portion of improvement that came from technology is over-estimated by about 50%. This means that a great deal of the time, the operator was just drilling in the right spots.
The price of oil has fallen nearly 60% since peaking in June, and lately there’s been a lot of ink and pixels devoted to the question of whether oil prices will plunge even further or whether they will shoot right back up. An even bigger issue is whether prices will stay at these very low levels.
While I doubt oil prices will fall much more — how much further could they reasonably tumble? Perhaps another $20 or so? — history suggests we can expect prices to remain low for the foreseeable future. What’s playing out right now in the oil market is likely the same supply-demand dynamic we’ve seen over and over: several years of extremely high oil prices followed by decades of low prices. The twin oil shocks of the 1970s, for instance, resulted in 20 to 25 years of low prices.
Of course, things are different today — but not that much different. Over the past six or seven years, oil has been relatively expensive, often trading at over $100 a barrel. During that time, both the supply and demand sides of the equation have responded.
Americans are spending more money at the pump than ever before. According to a recent estimate by the Energy Department, the average U.S. household spent nearly $3,000 on gasoline last year. Earlier this month, theU.S. Energy Information Administration forecast that the price for regular gasoline will average $3.63 a gallon this summer — a slight decline from last summer, not far from the record levels set in 2008. Why do oil prices remain so stubbornly high?
According to some in Washington, the blame lies with “speculators” — investors who buy and sell oil futures contracts to bet on the price of oil. As they see it, these scheming speculators — which may be individuals, but can also be mutual funds, hedge funds, or other investment institutions — inject billions of dollars into commodity exchanges in pursuit of a limited number of barrels, which in turn drives up the price of oil. Speculators, critics say, rake in piles of money at the expense of ordinary people who are going broke fueling their cars and heating their homes. Read More »