Has U.S. oil production started to turn down?

by Kurt Cobb

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The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn't be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise--until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015--even as the number of rigs operating plummeted. Shale drillers who are in debt--and most of the independents are heavily in debt--simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies--who don't have huge debt loads related to their tight oil wells--have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.

But the idea that these changes would somehow allow tight oil drillers to continue without missing a beat were always bunkham promoted by an industry sinking into a mire of overindebedness in the face of lower prices. In order to maintain the flow of capital to the industry--which has consistently spent more cash than it generates--the illusion of profitability had desperately to be maintained. A recent renewed slump in the oil price may finally pierce that illusion among investors.

As Iranian oil exports start to ramp up in the wake of an agreement on nuclear weapons--the Iranians aren't allowed to have any--and the resulting end of economic sanctions, the oil price is likely to fall further, putting even more pressure on U.S. domestic drillers.

OPEC, which has refused to reduce output in the face of slackening world oil demand growth, continues to say that others--such as U.S. tight oil drillers--will have to "balance the market," a euphemism for cutting production in order to push up prices.

It looks as if U.S. drillers may finally be doing just that. Who knew that 45 years after abandoning the role of the world's swing producers*--that is, producers who adjust production up or down to maintain stable world oil prices--U.S. oil companies would be forced into that role again entirely against their will?

*The state of Texas was the world's swing producer up until 1970 through a mechanism called proration. The state regulated the percentage of maximum flow from oil wells in order to adjust production and thus keep prices within a band that made drilling profitable without jeopardizing demand for oil. In fact, the proration program administered by the Railroad Commission of Texas became a model for OPEC.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitzen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Reprinted with permission.

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Replies to This Discussion

Permalink Reply by Joseph-Ohio on July 28, 2015 at 6:56am
So OPEC won't use 'Proration' (which they learned to use initially from us) to moderate price fluctuations in the World's Oil Supply ?

Well then, seems to me that the N. W. O. model fails to maintain order.

Surprise, surprise ? ! ?

NOT me !

Trade agreements, Treaties (with Allies) seem to me to be in order.

Sanctions / Tariffs / Embargos etc. (to the Non-Allied).

Then we'll see who our real Allies are and wait to see what happens next.

JMHO
Permalink Reply by Joseph-Ohio on July 28, 2015 at 8:49am
BTW, how does 'Proration' fit into the 'Free Market' model anyway (I wonder); as does also (but conversely) the tactic of 'flooding the market with oil to maintain market share' ?

These are both tactics created by the empowered to control / manipulate the market.

Seems to me there's no such thing as a 'free market' - only a market manipulated by the empowered.

Makes me laugh to think about the words 'free market' in application.
Permalink Reply by Tim Tarr on July 28, 2015 at 6:32pm
CVX (Chevron) just announced 1600 lay offs to save $1B. So what related work is getting cut? How many jobs will that be? Who is next? Nothing to be concerned about they can get 2 or 3 part-time jobs or just drop out of work force.
Permalink Reply by Puzzled on July 29, 2015 at 5:05am

The emperor has no clothes

Permalink Reply by Joseph-Ohio on July 29, 2015 at 5:08am
ok - I'll inquire.

What the heck you mean ?
Permalink Reply by Joseph-Ohio on July 29, 2015 at 10:21am
Like who's the emperor anyway ?

CHK ?

O. P. E. C ?

S. A. ?

Our leadership / legislators / government (State and Federal) ?

The Gas and Oil Industry in total and (our) government (basically all of the above) ?

Looks like utter chaos to me (in year 2015 to boot).

To me the whole lot of them fit into the category of greedy control freaky boobs trying to call their shots and missing most of the time.
Permalink Reply by Joseph-Ohio on July 30, 2015 at 3:38am
Judging by what I read here and elsewhere; what's going on now just isn't working for us.

I don't think we're alone in our perspective either.
Permalink Reply by Joseph-Ohio on July 30, 2015 at 4:39am
Stagnation is not progress / proactive.

Actually, for instance, stagnant water stinks.
Permalink Reply by Joseph-Ohio on July 30, 2015 at 3:02am
Remember Dwight D. Eisenhower ?

A President with foresight.

A leader.

Father of our Interstate Highway System.

Where is his equal in leadership today ?

Perhaps out on excursion smelling / sampling N. W. O. and 'Free Market' Bull Puckey ?

I say just plain absent.

I think we need a similar and massive Infrastrusture initiative today - complete with Federal Subsidy.

Build out necessary Infrastructure and initiate Federal Government subsidized conversion programs to enable taking advantage of our Natural Gas Blessings.

It's clear to me those empowered in the Industry (and unfortunately our Government / Legislators) have their heads stuck up their own buts on this.

JMHO
Permalink Reply by Undecided About Oil on July 30, 2015 at 7:04am

J.O.

Complete with Federal Subsidy <- HUH?

The Federal Government has already spent $18 Trillion more than it has collected in taxes.  And they have astronomical off-book unfunded liabilities.  I do not agree that Federal Gov't should go deeper into debt to bail out the Oil & Gas Industry.  The Federal Government should not be picking "winners and losers" with our tax dollars. Is that even Constitutionally allowed?

Getting more Federal Gov't involvement is the opposite of Free Markets.

The Federal Government should ...

1) Prevent consolidation of companies into monopolies

2) Prevent real pollution

3) Prevent worker abuse

4) Prevent collusion

5) Prevent financial fraud

... but not much more than that.

A Government that is powerful enough to give you everything you want,

is powerful enough to take everything you have.

As government grows, liberty decreases.

Thomas Jefferson

Permalink Reply by Joseph-Ohio on July 30, 2015 at 7:09am
Trick is to spend it in the right place.

Not boots on the ground defending the OPEC cartel's market / market share.

The subsidy spent on conversion programs and infrastructure should come FROM the National Defense Budget and that budget should not increase.

My belief is that the Federal Government is already (trying it's hand at) picking winners and losers in the Middle East / any other 3rd world country instead of taking care of things that matter here at home.

Been saying that for awhile as I watched the N. W. O. 'blossom' and in my opinion, then fail.

JMHO
Permalink Reply by Joseph-Ohio on July 30, 2015 at 7:18am
'A Government that is powerful enough to give you everything you want,

is powerful enough to take everything you have.

As government grows, liberty decreases.'

Same can be said for any Industry.

Also lately we have the Governmental / Industrial Complex to concern ourselves with (as it seems to me anyway).

Good luck to all of us 'Undecided About Oil' - Good Luck To All Of Us.

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