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The Shale Rebound
America’s Resurgent Oil Rigs

It’s been quite the rollercoaster ride for oil prices these last 25 months. From a peak of $115 per barrel in June 2014, prices careened down to just $27 before slowly building back up near $50. They’re now falling again, hitting two-month lows under $45 per barrel, largely because the American shale machine is now gearing back up. Bloomberg reports:

U.S. oil explorers expanded the number of rigs in action by 14 to 371 for the longest run of gains since August, Baker Hughes Inc. said Friday. Hedge funds and other money managers added the most bets in a year on lower West Texas Intermediate prices, according to U.S. Commodity Futures Trading Commission data. […]

Drillers added the most rigs last week since December, according to Baker Hughes. Machines have been put back to work in seven of the past eight weeks. U.S. crude production has halted its slide, increasing for a second week through July 15, according to data from the Energy Information Administration.

During oil’s price collapse, a number of shale producers found many of their projects no longer profitable, and America’s overall output stopped growing before eventually falling back down. Rig counts were the primary metric seized on by analysts and the media as evidence of the shale boom going “bust,” but we noted then that this was something of a problematic indicator—the first rigs taken out of operation were naturally the least profitable and least productive. In other words, this was more a culling of the herd than evidence of an impending population collapse.

But now that rig counts are climbing once again, we can expect a tighter correlation with production. The FT explains:

[T]he surge in the rig count that accompanied [shale] production growth blended less productive older rigs with more efficient newer ones…As the oil price fell two years ago, explorers quickly began to shed less effective equipment. Rig counts fell sharply last year (from 1,800 to 700) partly for this reason: the quickest way to cut costs was to eliminate lesser quality equipment. The result is that productivity, in terms of barrels per rig, from each new well there has doubled in the past couple of years. If this improvement is permanent, then one would expect a sharp pick up in oil output as the rig count increases.

America’s rig count is rising, and that’s a boon for our oil industry, our economy, and our energy security. It’s decidedly less than good news for U.S. shale’s petrostate competitors, who should probably start getting used to oil prices in the $40 range.

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  • Andrew Allison

    Isn’t the really significant news that producers have doubled production per rig in just two years?

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