In 2010, U.S. oil production started an exponential growth pattern: from just under 10 million to roughly 14 million bpd in 2014. This 30 percent increase in oil production fundamentally changed the global market. Tens of thousands of high-wage jobs were created across America, and oil-dependent communities experienced the ups and downs of burgeoning populations and economies.
However, at the end of 2014 the production boom reversed when OPEC decided to maintain a 30 million bpd production cap despite massive growth in non-OPEC production. Global prices dropped sharply. Production levels in areas with higher production costs dropped significantly. As a direct result, those high paying jobs dissipated and financially disrupted communities and families—a harbinger to oil and oil service companies across the country.
Federal Regulations & Permitting
Drilling requires multiple permits. The amount of time required varies with the type of permit and land ownership. For example, according to the U.S. House Committee on Natural Resources, an application for permit to drill (APD) on federal lands takes an average of 20 times longer than the same permitting on state or private lands. Federal regulations also disaggregate and disperse the land that is available for development due to endangered species habitat and other environmental regulations. This increases costs for companies who must build long roads to bypass protected areas. As a result, federal lands are often the last to be developed—oil fields with high concentrations of federal lands, and their surrounding communities, are frequently the last to benefit from development.
The BLM accepts “expressions of interest” (EOI) from oil companies for federal lands the companies would like to develop. The BLM uses these EOI’s as a factor in determining which lands to lease. From 2005–2010, approximately 50 percent of the EOI’s were put up for sale. In contrast, from 2010–2015, only about 10 percent of the land that companies expressed interest in were put up for sale. This and other application processes and regulations greatly decrease the incentive to develop on federal lands.
In addition, the Energy Policy and Conservation Act (EPCA) of 1975 bars exportation of U.S. crudes to other nations. This creates a captive market of producers for U.S. refineries and decreases the price U.S. producers can get for their oil compared to international crudes.
As a direct result of the EPCA, West Texas Intermediate (WTI) (a primary U.S. benchmark crude) prices have averaged $9.46 less than Brent crude (a standard global benchmark crude) since 2010. This price discrepancy is most burdensome during low price periods when margins are tight.
A recent U.S. Government Accountability Office study, and several private industry studies, suggest that the gap between U.S. benchmark crude prices and global crude prices would decrease significantly if the export ban were removed. This suggests that lower U.S. benchmark prices are largely artificial and created by the U.S. captive market rather than by free-market forces.
Fracking accounts for roughly half of U.S. oil development and is the primary driver of the 2010 U.S. oil production explosion. Fracking costs more than many other oil extraction methods. It requires additional equipment, trucking, and water storage that is not necessary in some other well types. As a result, low oil prices are proving difficult for U.S. fracking firms to maintain and new wells are increasingly less common.
Low prices have forced many fracking companies to restructure their operations by laying-off workers, reducing contractor work, improving processes, and increasing output with new technology and extraction methods. However, many industry leaders believe these cuts will force enough operational improvement for fracking companies to compete in any market environment. This manifests in more efficient drilling rigs, improved directional drilling, and improved water and sand injection techniques. These improvements increase profit margins, allowing many fracking firms to compete.
Shut-in Wells & Storage Capacity
Shut-in wells are wells that have been placed on hold for production as producing companies wait for higher prices to increase production. Earlier in 2015, up to 3,600 wells were reported as shut in in the United States.
These wells act as a cap on new development and prices. As prices increase slightly, companies can restart idled wells quickly, thereby increasing supply and driving prices back down. This acts as a “backlog” that has to be worked through before new wells are likely to be drilled in earnest.
Oil storage capacity and refined petroleum product storage capacity are nearly full. These refined products will absorb the impact of demand growth over time, as the current inventory must be used before new product is needed. In addition, many manufacturing companies that use petroleum in their products have exploited low prices by expanding their inventory. All of these factors will delay the impact of increased oil consumption on oil prices. This threat has caused many investors to drop stocks in oil, and raises concerns about the potential duration of current low prices.
Since oil prices have fallen, lenders—especially banks—have increased their scrutiny of oil field investments. This results in capital that is either not available or is increasingly difficult to access for production firms and support companies. It also reduces the ability of those who are operating profitably to expand.
Public opinion drives public policy. Typically, public sentiment motivates elected officials, who then regulate based on their perception of public opinion (or at least the opinion of their political base). While Utah likely favors fracking, according to a 2015 Gallup poll, national opinion is currently split down the middle: 40 percent support, 40 percent oppose, and 19 percent are undecided. Younger Americans and Democrats tend to oppose fracking, while Republicans and older Americans tend to support fracking development. These opinions tend to be geographically spread: several eastern states recently adopted fracking restrictions, while western states tend to accept and promote energy development within their jurisdictions.
If opinion swings away from fracking or oil development generally, more stringent regulations can be expected. Similarly, if the younger generation maintains their current perspective, the majority of the U.S. will oppose fracking as a development technique.
Map of Factors
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