Posted on 05/17/2014 1:22:08 PM PDT by ckilmer
By Keith Kohl
Tuesday, May 13th, 2014
Nowhere else in the world are people more used to the boom and bust of the oil industry than in Texas.
I think it's safe to say that nearly all of us have heard of the historic gushers in the state's history — and the famous Lucas Gusher at Spindletop is arguably the most famous of them.
That single exploratory well in Beaumont started it all for the Lone Star State.
And while the image of 100,000 barrels of oil exploding out of the top of one well is impressive, I feel it pales in comparison to the Beaumont scenery just two years afterwards...
By 1904, production at Spindletop had dwindled to just 10,000 barrels per day.
About two decades later, another exploratory well — the Santa Rita No. 1 — was drilled in West Texas and kick-started an oil boom that lasted seven decades.
The oil bust that took place after prices collapsed in 1981, however, is still fresh in Texans' memories. Production plummeted from 2.5 million barrels per day that year to just over 1 million barrels per day in 2007.
Now, it seems Texas is getting a third chance at an oil boom.
And this time around, it has to last... for the sake of all of us.
Trade Better, Trade Smarter
Of all the factors out there that can make the U.S. oil boom go bust, one of the largest threats is low prices. After all, this is exactly what drove drillers in the lower-48 states to all but abandon natural gas for more liquids-rich prospects.
But how much of a decline are we talking about here?
A month and a half ago, Wood Mackenzie contended that with crude trading for over $108 per barrel in London, virtually all our tight oil reserves are economical. In fact, their principal downstream research analyst, Harold York, pointed out recently that at least 70% of proved light oil reserves from tight plays would be profitable even if global oil prices fell to $75 per barrel.
Below, you'll see that the last time Brent prices were that low was four years ago. In fact, that can also be said for Western Texas Intermediate, which trades at a discount to the global benchmark.
Click Chart to Enlarge
As you can see, even if the breakeven price for U.S. tight oil production were $90 per barrel, there have only been a handful of times that WTI prices dipped below that level since 2011. Of course, with the exception of one slight dip in 2012, Brent crude has steadily traded in triple digits the entire time.
Truth is, I love seeing the doom-and-gloom oil price forecasts, which always seem to flood my email inbox whenever oil breaks $100 per barrel.
Has $100 per barrel become the new normal?
Perhaps a better question is whether we can afford to let crude prices fall below $75 for an extended period of time.
Even though oil consumption in the United States is roughly 18.5 million barrels per day, demand has been relatively flat for the past two decades:
Click Chart to Enlarge
Thing is, we're talking about a staggering amount of oil. Then again, if you think we are swimming in crude oil right now, you're wrong.
Assuming the EIA was correct after reporting that U.S. oil production would reach 9.6 million barrels per day in 2019 (for now, let's give them the benefit of the doubt), our daily output would increase by about 1.6 million barrels per day over the next five years. Needless to say, nearly all of this would come from tight oil production in the lower-48 states.
Unfortunately, that amount is far from fully replacing the 7.2 million barrels of crude oil we currently import every day.
Assuming the EIA was correct after reporting that U.S. oil production would reach 9.6 million barrels per day in 2019 (for now, let’s give them the benefit of the doubt), our daily output would increase by about 1.6 million barrels per day over the next five years. Needless to say, nearly all of this would come from tight oil production in the lower-48 states.
Unfortunately, that amount is far from fully replacing the 7.2 million barrels of crude oil we currently import every day.
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Didn’t we see an article that said that most of the new drilling in the USA right now is being done in the Permian basin. My bet is that the EIA estimate of domestic production increases flattening out is based on production from the Baaken and the Eagle Ford. Which may be true. However, based on the tight oil reserves in the Baaken and the very large drilling increases in the Permian — its a safe bet that permian production increase curve is going to get steeper. I think the permian could produce 5 million barrels @ day. But that’s still not enough to make up for 7.2 million barrel deficit. I also think that the Tuscaloosa lime formation could produce 1 million barrels a day by 2019 but again that’s still not enough to kill all imports.
7.2 million barrels may be too high a bar. The US may never attain oil independence based on production gains alone.
> Of all the factors out there that can make the U.S. oil boom go bust, one of the largest threats is low prices. After all, this is exactly what drove drillers in the lower-48 states to all but abandon natural gas for more liquids-rich prospects.
The natural gas boom will pick up a bit if the dick-tatorship stops blocking the LNG export facility wanted for Maryland. Meanwhile, the Keystone XL pipeline doesn’t prevent the Canadian crude from reaching the US market (by train instead of pipeline). Thanks ckilmer.
The only way the US can achieve energy dependence is to DRAMATICALLY reduce consumption. Maybe enough rigs and materials could be built and obtained but enough people to run the rigs? Probably not. Even if it were practical or possible to build that many rigs and operate them the declines in shale far outpace the new drill well output.
Energy independence from shale is folly.
Oil prices will not be going down much or for long unless there is another economic collapse and even then, well, you saw what happened last time.
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