Oil & natural gas.

• Author: Johnson, Terry
• Position: A NEW TECHNOLOGY PARADIGM?

The U.S. oil and natural gas industries had a tough year in 2015. Excesses in world production, political unrest and new technologies all contributed to the variability in oil, and to some degree, natural gas prices. Although oil prices have declined significantly, current production trends suggests that lower prices have not translated to a corresponding drop in U.S. production. For natural gas, prices have been more stable, but still well below historical averages.

Oil production nationally has only mildly decelerated, despite sustained low prices. By the second quarter of 2015, production had increased to 856.7 million barrels for an annual increase of 9 percent. Annual growth accelerated over 14 percent between 2011 and 2015. This growth occurred even though well head prices were erratic. For example, third quarter 2015 prices average $47.79 per barrel compared to the 20112015 post-Great Recession prices of $90. Since late 2014, prices have plummeted and have averaged about $48 per barrel. With significantly lower well head prices, it would be reasonable to expect production to decline, unless lower prices promote higher consumption.

[FIGURE 1 OMITTED]

According to the Energy Information Administration (EIA), total world output of oil has increased 10.2 percent from January 2008 to March 2015. Conversely, total world oil consumption declined by almost 9 percent. Over the past year, output and consumption have been almost equal. Even with more affordable oil getting to market, world consumption has declined. And, with lower well head prices, there has not been a reduction in production amounts.

EIA data show that production in the U.S. increased by 38.6 percent from 2011 to 2015, while all other world production increased by only 1.4 percent. The energy revolution has changed the energy landscape, especially for the U.S. oil sector. Horizontal drilling, hydraulic fracking, mobile drilling rigs and multi-well drilling pads have all contributed to enhanced production in the U.S. These new technologies have increased production at lower costs in places like North Dakota, Texas and New Mexico.

Although oil...