American Oil Is Coming To Flood The Market. Or Is It?

In November 2018 the United States produced a record 11.5 million barrels per day of oil. This is according to data released by the U.S. Energy Information Administration (EIA) in December. The United States is now the largest oil producer in the world – bypassing both Russia and Saudi Arabia. But this is just the beginning , according the EIA’s forecasts.

An oil well jack pump at sunset in the Bakken oil field north of Williston, North Dakota. (William Campbell/Corbis via Getty Images)Getty

In 2019, the EIA expects the U.S. to produce an average of 12.1 million barrels per day. For comparison, this is higher than what Saudi Aramco, the national oil company of Saudi Arabia, says it can produce.

President Donald Trump is counting on this flood of American oil to keep fuel prices low for consumers and for the manufacturing sector he is seeking to revive. This is especially important as the new U.S. sanctions on Iran’s oil industry are (presumably) tightened this spring.

New pipelines scheduled to come online in Texas in 2019 will assist in moving this crude oil to domestic and international markets. If all goes according to plan, these pipelines will be able to transport an additional 1.74 million barrels per day of oil with even more coming online in 2020 and 2021. This will make it easier for oil companies to produce more oil and will help them cut shipping costs.

This is a very rosy picture of a future dominated by American energy production. It is also a forecast, and forecasts are often incorrect.

A new study from Rystad Energy AS and reported on by the Wall Street Journal claims that fracking companies are routinely incorrect in their assumptions about oil well productivity. In fact, their wells generally produce 10% less oil and gas than their projections showed. In some regions, companies produce 50% less oil and gas than they expected. This is concerning, because fracking accounts for most of the new oil and natural gas wells drilled in the U.S.

It is also not a new concern. In fact, producers have known for some time now that fracking wells suffer from higher rates of decline than conventional oil production. According to the EIA, the decline rate in the regions with the most fracking are highest. Many drillers don’t seem phased by this, and as older wells produce less, they just drill new wells.

At some point, the most productive shale oil regions will become exhausted and drillers will have to invest more money as they seek out regions with harder-to-access oil. When this time comes, America’s oil productivity rates will likely decline and the cost of fuel will increase. Of course, no one knows when these fields will become exhausted nor what technology may be developed to reach even harder-to-access oil.

Oil price is also an issue. In the last month of 2018, oil prices plummeted to lows not seen in two and a half years. If these low prices remain, more and more shale oil companies will find it increasingly difficult to pay their bills, let alone make a profit. If their Wall Street funders decide to pull the plug, American oil production will not grow at nearly the rate it did in 2018. We might even be in for production declines if prices to do not climb above the $50 per barrel mark.