Oil Rig Efficiency Being Overlooked

January 14, 2015


[This article originally appeared on HardAssetsInvestor.com and is republished here wtih permission.]


Crude oil prices are in the midst of the worst free fall in years, pressured by burgeoning supplies and tepid demand. But even as supply sharply outpaces demand, the Organization of the Petroleum Exporting Countries has refused to intervene, leaving the market to find an equilibrium on its own.


While a potential increase in demand may play a part in balancing the oil market, supply will likely play the biggest role. Up 1.9 million barrels per day, supply growth outside of OPEC countries grew at the fastest pace on record in 2014, according to the International Energy Agency.


A number of countries contributed to last year's supply surge, but the largest chunk came from the United States, where output grew 1.1 million barrels per day. Since 2012, the U.S. has been in the midst of the country's greatest oil boom in decades, but that could be at risk now that prices have fallen so dramatically.


Do lower oil prices mean the U.S. oil boom is over?



Many analysts believe that because the U.S. is one of the higher-cost producers in the world, its oil industry will be hardest hit by the decline in oil. We agree; however, there is reason to believe U.S. oil production will be more resilient than many expect.

On Jan. 9, Baker Hughes reported that the number of rigs drilling for oil in the U.S. dropped by 61 to 1,421, the largest weekly decline since 1991. Since October, the number of oil rigs has fallen by 188.



One would think a decline in the number of rigs drilling for oil would lead to a decline in oil production. But that's not necessarily the case. That's because U.S. producers are becoming increasingly efficient in their operations.

This was demonstrated quite clearly in 2009 and 2012, when massive gluts in the natural gas market led to plunging prices for that fuel, as well as a sharp decline in the number of rigs drilling for natural gas. In both occasions, the natural gas rig count fell by 60 percent, as can be seen from the chart below.



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