The United States experienced phenomenal growth in oil production from 2017 to 2019, when oil prices were lackluster. Prices are much higher today, which should be a bigger incentive to increase production, but US production is increasing moderately. Why American oil production no longer growing? It’s a question that has baffled many, from Washington politicians to anyone who’s had sticker shock at the gas pump this year. Today’s note examines U.S. oil production trends, factors limiting growth, and why this is arguably a good thing for energy infrastructure companies.
American oil production: the good days of growth give way to moderation.
The transformation of the United States into a major oil producer and exporter in the space of ten years is truly remarkable. It may go without saying, but the price spike this year following Russia’s invasion of Ukraine would have been much worse had it not been for the large US oil production. In the years leading up to the pandemic, oil production in the United States saw a meteoric rise, with annual production increasing by approximately 3.0 million barrels per day (MMBpd) from 2017 to 2019, as shown below. -below. Production reached an all-time monthly high of 13.0 MMBpd in November 2019 before collapsing to just 9.7 MMBpd six months later following the pandemic and falling oil prices. Annual production was essentially flat in 2021, but volumes increased in 2022 with higher prices. The latest August monthly production figures came in at 12.0 MMBpd – still well below the previous high but up 0.7 MMBpd from August 2021. Production is expected to reach a new annual high in 2023, as shown in the graph below, but monthly production is forecast to reach only 12.6 MMBpd in December 2023.
Why isn’t US oil production growing more at today’s high prices?
Despite large reserves, significant industrial expertise in shale production and financial incentives linked to rising oil prices, US oil production is growing only modestly for several reasons. Public exploration and production (E&P) companies have committed to capital discipline with modest growth after years of destroying value by ramping up production too aggressively. Along with volatile commodity prices, the growth-for-growth momentum has put energy stocks on the penalty bench for many years. Having learned their lesson, management teams are complying with investor mandates to focus on returning cash to shareholders and keeping tight control over production (i.e. stable 5% growth). Without pressure from public shareholders, private oil and gas producers have had more leeway to increase volumes and have helped drive much of the growth seen so far in 2022.
Beyond the capital discipline of public producers, labor and supply chain constraints are also impediments to production growth. On its recent earnings call, oil services company Liberty Energy (LBRT) pointed to the tight fractionation market and the ongoing challenges of securing heavy equipment. Inflation in material and labor costs has also increased the cost of drilling a well. Diamondback (FANG) reported well costs were up 15% year-over-year on their 2Q22 earnings call in early August. Higher prices no doubt help offset higher well costs, but if a producer is trying to stick to a certain capital budget and prices go up 15%, the business may have to be smaller than expected.
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