US is catching up with Russia in oil production

The International Energy Agency (IEA) predicted a strong growth in oil production in America. It is expected that this year it will reach 10.2 million barrels per day - the United States will regain its leadership in global oil production, which was lost in the 1970s. Americans, who are not constrained by any international agreements to limit production, will bypass Saudi Arabia and catch up with Russia. "" understood, due to what the oil boom in the United States will happen and whether this outbreak will last for a long time.

Tremors of the Earth

In 1970, oil production in the US reached a historic high of 9.6 million barrels per day. At that time, the Americans were undoubted leaders of the world oil market (considerably ahead of the second largest USSR) and provided more than 90 percent of their own needs. But even 14 years before that, American geologists had predicted that production would reach its peak in the early 1970s, and would not grow in the future. Since 1971, oil production in the United States began to decline steadily, while consumption continued to grow rapidly. The deposits were exhausted, and by the early 1990s, America had already imported more than half of the used "black gold" from abroad. According to all forecasts, the dependence of the US on oil imports over time should only increase.

In the 2000s, an unpredictable "black swan" appeared in the market in the form of technology of fracking, or hydraulic fracturing of oil-bearing layers. It turned out that shale oil, which previously was considered difficult to extract, can be quite cost-effective. Technology has existed before, but the production of shale oil was scanty. In the 2000s, when oil prices soared to prohibitive levels, more and more producers began to pay attention to unconventional sources of hydrocarbons. Fracking developed rapidly, and by 2008, Americans were surprised to find that oil production in the country began to grow very rapidly.

At the beginning of the technology of fracking, the United States produced less than 6 million barrels per day, but by 2014 this figure has grown by one and a half times, that is, in 2010 the production grew faster than it fell in the 70-80's. While the situation with classical oil did not improve, the entire growth was ensured by the shale industry, in which the real revolution took place. Every year, dozens of small companies came to the market, who often had only one drilling rig, but in the conditions of ultra-high prices in the first half of the 10th years it was very profitable, and most importantly, it did not require huge capital investments.

The Royal Miscalculation

For a long time, however, it was believed that US shale oil was profitable only at high prices. A few years ago, the average production cost was estimated at $ 50 to $ 80 per barrel. In the fall of 2014, when world oil prices began to fall precipitously, many predicted the end of the shale industry in the US.

Actually, then it was repeatedly written that Saudi Arabia was directly involved in the collapse of prices, and the purpose of Riyadh was just to get the Americans out of the game. The Saudis were ready to suffer a couple of years of lower profits (the cost price of oil production in this Arab country is one of the lowest in the world), if the "lean", that is, the USA, "dies" first. However, contrary to all forecasts, US oil shale producers survived, despite the fact that during the period 2015-2016 the number of drill collapsed four times. At the same time, production fell by only 12 percent - a lot, but not catastrophically.

As a result, Saudi Arabia itself was "blown away" in these games, and at the end of 2016 it supported OPEC in its desire to freeze production. Moreover, Riyadh this time took the task extremely seriously (before, many producer countries, including the Saudis, regularly violated quotas). In order to ensure maximum effectiveness of the agreement, even Russia, which never entered into OPEC and did not plan to do so, attracted its signing.

The Americans, in turn, experienced several unpleasant years, but through the optimization of production they were able to defend their industry even in the conditions of the most severe pressure of low prices. It turned out that even at $ 60 per barrel most manufacturers are quite profitable, and many can withstand $ 30. In the end, most analysts agreed that the key is the mark of $ 50 per barrel. If oil is cheaper, then shale mining in the US declines, if more expensive - it grows.

2017 brought great relief to American oil companies - thanks to the agreement between OPEC and Russia, prices lasted almost 50 dollars for almost the whole year - the industry began to recover. For the year, according to the Energy Information Agency (EIA), growth was almost 15 percent, from 8.6 million barrels per day to 9.9 million by the end of 2017 - the US managed to update the historical maximum for oil production.

Uncle Sam returns

But the oil industry of the United States does not intend to stop at this. According to the forecast of the International Energy Agency, production this year will continue to grow. Analysts of the IEA predict that the volume of oil production in the US will exceed the level of Saudi Arabia (10.2 million barrels per day) and reach the level of Russia (10.9 million barrels). Thus, for the first time in nearly half a century, the United States has a chance to regain the title of the world's "energy superpower".

Many factors support this assumption. First, the price of oil has already surpassed the mark of $ 70 per barrel. The price increase last year allowed to increase production, it is expected that in 2018 the situation will repeat. The likelihood of relatively high prices is quite high: the same forecast by the IEA shows that demand will increase by 1.3 million barrels per day, and the main producing powers will continue to honor the agreement on limiting production.

The investment climate for American oil companies will also improve. There is every reason to believe that the current US administration is betting on hydrocarbon resources, rather than on "green" energy. It is no accident that in the annual address of Donald Trump to the Congress did not appear at all the words "climate change". But it is this process that spurs Europeans to give up oil and gas and switch to sun and wind as sources of energy. It is necessary to add also the recent tax reform, which weakens the burden for corporations, - the effect may appear already this year.

Ambiguous shale

Nevertheless, to say that the United States will certainly make a new breakthrough in oil production this year is too early. The fact is that the state of the shale industry in the country is far from optimal. The investment boom that has captured the industry since 2010 is speculative. Investors often look not at the profitability of the company, but on the growth of its turnover. The problem is that when the owners of the hot money pouring into the slate become tired of waiting for profits, the bankruptcy of dozens of companies operating in the market will become inevitable.

There are also issues to reduce the cost of production, which was declared by the industry in recent years. Due to cost cutting, it was really possible to remain afloat during the most difficult periods of 2015-2016. However, it is not certain that the cost reduction was due to technological optimization. On the contrary, there is every reason to believe that the costs follow the very price of oil: when it decreases, they decline, and grow again when "black gold" becomes expensive.

In this regard, the profitability of shale companies may not grow even despite the growth of world prices. And the industry needs investments - the number of drilling companies at the end of last year did not exceed 750, which is almost 40 percent below the maximum reached in 2015. In addition, during the production of oil shale oil wells run out rather quickly, so to maintain a high level of production it is necessary to drill a lot, not to mention the fact that in recent years the cheapest wells at the cost of production have been developed.

Race leaders of the world oil market remains unpredictable. Some conclusions can be made by the middle of the year, when it becomes clear whether US companies will be able to increase production following the increase in prices. America's oil shale can once again shame the skeptics - or finally complete its almost 15-year cycle of unprecedented growth. In any case, the US as a participant in the top three oil-producing countries returned to the market seriously and for a long time.

Arthur Swan
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