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Hail Shale
Here Comes the American Crude Resurgence

Don’t look now, but American oil production is finally starting to rebound. After tapering off following the collapse in crude prices, U.S. crude production rose in August, according to data compiled by the Energy Information Administration (EIA). The FT reports:

From its peak in April 2015, US production had fallen about 883,000 b/d by August, but its decline has been significantly slower than many forecasters expected after the oil price crash triggered a sharp slowdown in drilling activity.

Some US oil exploration and production companies, including ConocoPhillips, Pioneer Natural Resources, Hess and Marathon Oil have low enough costs and strong enough cash flow to be able to drill enough new wells to increase production without tapping the capital markets for additional financing, according to a study published by Wood Mackenzie, the research group, last week.

Chevron, the second-largest US oil company by market capitalisation, said on Friday that its production in the Permian basin shale oil region of west Texas was 24 per cent higher in the third quarter of this year than in the equivalent period of 2014, and was on course for strong growth to beyond the end of the decade.

August’s numbers are the latest monthly data available, and they show a 51,000 barrel per day (bpd) increase over July’s average output. That’s the first significant increase in American oil production since April 2015, when we hit a peak output of 9.63 million bpd. Since then, bargain prices have forced producers to scale production as they’ve shuttered less profitable projects. Most shale production was believed to be in that higher-cost category, and therefore be highly susceptible to cuts in this recently bearish market, but American frackers have shocked the world with their ability to cut costs and innovate ways to stay in the black (and keep pumping the black). Now, with oil prices stabilizing in the $45-51 per barrel range, there’s a sense that the U.S. shale industry once again has its feet underneath it.

With the slide seemingly over, it’s time to look at what’s ahead for American oil producers. On that front, there’s reason for optimism: if—and that’s still a big if—OPEC producers and various other petrostates (like Russia) are able to agree on a deal to coordinate and even cut their production in the coming weeks, oil prices will inevitably rise. If and when that happens, it will be a shot in the arm to the American shale industry, which has proven itself capable of quickly adapting to market conditions. The first step of getting out of a hole is to stop digging, and it seems we’ve done that. Shale producers could shock the world, though, in how quick they’re able to climb out and restart this energy revolution again.

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  • Proud Skeptic

    Let’s pause for a moment and consider an alternate universe where the American president and his administration strategically decided that creating a glut of oil on the market would do more to combat terrorism and Russian influence than any single foreign policy they could implement.

    As we all know, what would then happen is that huge subsidies would be pumped into oil production. These subsidies would, of course, be paid for with taxpayer money. The oil would flow, of course, but the incentive for producing it as cheaply and competitively would be missing so none of the technological breakthroughs in fracking would have happened.

    The US would be stuck with producing $100 a barrel oil while selling it for $40. The US government would be guilty of predatory pricing, instead of simply letting the market price it. Oil companies would be far weaker and less efficient, never having been forced to innovate. As soon as the president or Congress decided it was politically advantageous to stop the subsidies, our production would go back down and there would be economic problems at home.

    And…of course…the petro states would be in much better shape.

    God Bless the Market. Amen.

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