For the first time in 34 years, US oil production has risen for three consecutive years. Since reaching a low in 2008, output has increased by 1.2 million barrels per day and America’s reliance on imported oil has fallen to 66% of consumption from 75%.
America’s 21st century energy boom is the result of aggressive development of unconventional US oil plays such as the Bakken Shale in North Dakota and the Eagle Ford Shale in south Texas. Horizontal drilling and hydraulic fracturing, innovations that improve the flow of oil through shale rock, have enabled producers to unlock billions of barrels of new oil reserves (see “The US Oil Gusher”).
Although this upsurge in domestic US oil production is a tremendous boon to the US economy, non-OPEC oil production outside North America is expected to fall in 2012 because of production outages and project delays.
More than 1,400 onshore rigs are drilling for oil in the US, up from less than 180 units in mid- 2009. This unprecedented surge in activity was possible because producers in shale plays earn strong returns when oil prices are between $80 to $100 per barrel. But if oil prices were to drop below $70 per barrel for a prolonged period, producers would scale back their activity.
Although US oil demand has declined because of the sluggish economy, China and other emerging markets continue to experience strong demand growth. Chinese oil imports hit an all-time high in early 2012.
The increase in global oil demand continues to exceed the growth in non-OPEC production, keeping the balance in global oil markets tight. Crude oil prices have already pulled back enough to reflect the slowdown in the global economy. Look for the price of West Texas Intermediate crude oil, the US benchmark, to average between $90 and $100 per barrel in coming years. Brent crude oil, which better reflects global supply and demand, should average $100 to $110 per barrel.