The Strategist

America regains its role on the world oil market

02/02/2018 - 10:33

Oil production in America returned to record heights - 10 million barrels per day, just like 47 years ago. Thanks to the oil prices that have grown in recent months, it is now time to talk about the return of the slate revolution.

The Energy Information Administration (EIA) reported on Wednesday that in November 2017, US oil companies reached the level of oil production at 10.04 million barrels per day. This is quite a bit inferior to the record level of production recorded in November 1970 in the entire history of the US oil industry. The jump is impressive: recall, America produced about 5 million barrels per day in 2008. Thanks to shale oil, which plays a major role in the growth of production, the US, which until recently was the largest importer of oil, has every chance to bypass Saudi Arabia and Russia and become the main producer of oil in the world.

Naturally, the return of the already forgotten role of America in the world oil industry, which happened thanks to the return of the recent slate revolution, cannot but affect the situation in the oil markets. Even more, however, it affects the US economy. President Trump celebrated the anniversary of his stay in the White House with repeated reminders of progress in this area. So, the oil industry was the main locomotive of the American economy last year. It has created tens of thousands of new jobs, strengthened the energy security of the United States and gave Washington new opportunities to impose sanctions to strengthen its influence on the planet.

"For decades, the only issue was how fast the US oil imports would grow," said vice chairman of IHS Markit Daniel Yergin. "First, the oil markets were pounded into a bottle, and then shaken thoroughly. As a result, the situation has changed significantly."

The US continues to buy oil from other countries, but oil imports have collapsed. In October last year, it fell to 2.5 mln barrels per day from 12.9 mln in 2006. America began to trade in oil. In January-September 2017, the US exported about 50 million barrels of oil to China, 20 million barrels to the UK and 7 million barrels to India.

After a long decline in production in the 80 years of the last century, the industry began to grow in 2009. Independent companies such as EOG Resources started to use horizontal drilling and hydraulic fracturing of the reservoir. Then, the US oil industry, together with colleagues from other countries, found itself in a knockdown after the collapse of oil prices in 2014. Dozens of companies went bankrupt. However, banks and investors (not without the government's non-involvement) supported the oil industry and helped many small and medium-sized companies to stay afloat with loans, which were the main participants in the slate revolution.

The collapse of prices forced oil producers to significantly improve the extraction efficiency and enhance technology. As a result, productivity has sharply increased. A working well in the Permian basin in Texas and New Mexico averaged 196 bbl/day four years ago. Now, according to the EIA, this figure has increased by more than three times to 628 bbl/day. Number of employees sharply decreased to 77% compared with the peak, which was recorded in September 2014.

Unlike traditional projects in the oil industry, which can drag on for years, drilling wells for the production of shale oil usually takes a couple of weeks and costs several million dollars, that is, the speed of response to the volatility of the market has grown significantly. As oil prices began to rise last year, the shale drillers very quickly resumed the work of the rigs. Experts believe that oil production in America will continue to grow.

On January 9, the EIA announced its forecast that in 2019 it should grow to 10.9 million barrels per day. Suffice it to say that ExxonMobil announced this week plans to increase production of shale oil in the Permian Basin, which gave almost a third (30%) of the company's production growth in recent years and is bringing it to half a million barrels per day.

The sharp increase in the production of shale oil in America is hurting the finances of other oil-producing countries.

"Slate limited OPEC's ability to manipulate oil prices," said Jason Bordoff, director of the Center for Global Energy Policy at Columbia University. "OPEC members should get used to this new hostile dynamic."

Some analysts believe that slate will limit the growth of prices for black gold, but the shale industry is still very young and it will take some time to sort out all the consequences of its appearance and development.