Carpe Diem

US oil production grew more in 2012 than in any year in the history of the domestic oil industry back to the Civil War

oil

From Saturday’s WSJ:

U.S. oil production grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013. Daily crude output averaged 6.4 million barrels a day last year, up a record 779,000 barrels a day from 2011 and hitting a 15-year high, according to the American Petroleum Institute (API), a trade group. It is the biggest annual jump in production since Edwin Drake drilled the first commercial oil well in Titusville, Pa., two years before the Civil War began (see chart above).

The U.S. Energy Information Administration predicts 2013 will be an even bigger year, with average daily production expected to jump by 900,000 barrels a day. The surge comes thanks to a relatively recent combination of technologies—horizontal drilling and hydraulic fracturing, or fracking, which involves pumping water, chemicals and sand at high pressures to break apart underground rock formations.

Together, they have unlocked deposits of oil and gas trapped in formations previously thought to be unreachable.

That has meant a resurgence of activity in well-established oil regions, such as West Texas’s Permian basin, as well as huge expansions in areas that had been lightly tapped in the past, such as North Dakota’s Bakken shale region. The Bakken has gone from producing just 125,000 barrels of oil a day five years ago to nearly 750,000 barrels a day today.

The benefits of the surge in domestic energy production include improving employment in some regions and a rebound in U.S.-based manufacturing.

MP: Actually, the API’s estimate of a 779,000 barrel per day (bpd) increase in domestic oil last year is pretty conservative compared to year-end comparisons of EIA data for weekly US oil production. Compared to oil output at the end of 2011 (5.846 million bpd), US oil production increased by 1.139 million bpd last year to almost 7 million bpd during the last week of December 2012. Alternatively, using the EIA’s four-week production averages show an increase of 1.063 million bpd from December of 2011 to December 2012. The reason that the yearend comparison shows a much higher annual increase in US oil production (about 1 million bpd vs. 779,000 bpd) is that domestic oil production accelerated during the second of last year - crude oil output increased 14.6% during the second half of 2012 compared to the 4.2% increase during the first six months.

The record increase in oil output last year reminds us the US oil and gas industry continues to be at the forefront of the otherwise sub-par economic recovery, and without that sector’s strong growth in output and jobs, the economy’s sub-par performance would be even more lackluster. The 1 million bpd increase in domestic oil production last year has delivered a powerful energy-based economic stimulus to the economy, creating thousands of new direct, shovel-ready jobs in oil and gas activities, and igniting many spinoff business and indirect jobs throughout the oil and gas supply chain like the “oil-by-rail shipping boom.” The future of the US economy over the next few years looks a lot brighter because of America’s surging domestic energy production.

18 thoughts on “US oil production grew more in 2012 than in any year in the history of the domestic oil industry back to the Civil War

  1. And some say California’s Monterey field will eventually dwarf other U.S. plays….

    That is, if the price can hold. I wonder if $90 s barrel is sustainable.

    Meanwhile, Ford’s new PHEV Fusion automobile gets—ready?—100 mpg.

    BTW, Ford (with an engineer upstairs) is making some of the best cars and trucks in the world now, and consistently improving….

    Bush jr. and his wretched subsidized ethanol, and Obama and his clueless wind and solar plants, ought to be sent to the dunce corner for a few years….let the free markets work

    • “… the drillers in Texas had important allies in Washington …The Bush administration worked from the start on finding ways to unlock the nation’s energy reserves and reverse decades of declining output, with Mr. Cheney leading a White House energy task force that met in secret with top oil executives.

      “Ramping up production was a high priority,” said Gale Norton, a member of the task force and the secretary of the Interior at the time. “We hated being at the mercy of other countries, and we were determined to change that.”

      The task force’s work helped produce the Energy Policy Act of 2005, which set rules that contributed to the current surge. It prohibited the Environmental Protection Agency from regulating fracking under the Safe Drinking Water Act, eliminating a potential impediment to wide use of the technique. The legislation also offered the industry billions of dollars in new tax breaks to help independent producers recoup some drilling costs even when a well came up dry.

      Separately, the Interior Department was granted the power to issue drilling permits on millions of acres of federal lands without extensive environmental impact studies for individual projects, addressing industry complaints about the glacial pace of approvals. That new power has been used at least 8,400 times, mostly in Wyoming, Utah and New Mexico, representing a quarter of all permits issued on federal land in the last six federal fiscal years.

      The Bush administration also opened large swaths of the Gulf of Mexico and the waters off Alaska to exploration, granting lease deals that required companies to pay only a tiny share of their profits to the government.

      These measures primed the pump for the burst in drilling that began once oil prices started rising sharply in 2005 and 2006.” — The New York Times

      Yeah, Barack Obama inherited this mess – the only economically productive part of his miserable tenure as President – from Bush Jr.

    • “Bush jr. and his wretched subsidized ethanol …” — Benji

      “Years before the Obama Administration dumped $70 billion into solar and wind energy and battery operated cars, and long before anyone heard of Solyndra, President Bush launched his own version of a green energy revolution. …

      … the Nancy Pelosi Congress passed and Mr. Bush signed a law imposing mandates on oil companies to blend cellulosic fuel into conventional gasoline. This guaranteed producers a market. In 2010 the mandate was 100 million barrels, rising to 250 million in 2011 and 500 million in 2012. By the end of this decade the requirements leap to 10.5 billion gallons a year.”

      Only one problem. There is no cellulosic ethanol to blend. No one produces it. But that didn’t stop the Democrats from collecting noncompliance penalties in the form of “waiver credits”:

      Because there was no cellulosic fuel available, oil companies have had to purchase “waiver credits”—for failing to comply with a mandate to buy a product that doesn’t exist. In 2010 and this year, the EPA has forced oil companies to pay about $10 million for these credits. Since these costs are eventually passed on to consumers, the biofuels mandate is an invisible tax paid at the gas pump. …

      Still, the subsidies roll on. In August 2011 the Obama Administration funded a $510 million program in partnership with the Navy to produce advanced biofuels for the military. In September the feds loaned $134 million to Abengoa Bioenergy to build a cellulosic plant in Kansas. The optimistic forecast is that this plant will produce about 23 million barrels a year—a fraction of what Washington promised in 2006. In September the Department of Energy provided POET, which advertises itself as the “world’s largest ethanol producer,” a $105 million loan guarantee for cellulosic.

      To recap: Congress subsidized a product that didn’t exist, mandated its purchase though it still didn’t exist, is punishing oil companies for not buying the product that doesn’t exist, and is now doubling down on the subsidies in the hope that someday it might exist. We’d call this the march of folly, but that’s unfair to fools.” — WSJ

      Now, that, really is wretched.

  2. We have to expend more resources for the same barrel of oil, because the “easy” oil is being depleted.

    Energy will be more costly for developing countries, to develop, compared to developed countries.

    Even with depression in the U.S., and decline in the E.U., no other country, or group of countries, will likely displaced the U.S. as the world’s superpower.

    China, for example, not only has problems with energy, it also has problems with population (as the country ages):

    China’s working-age population drops in 2012
    January 19, 2013

    “The number of working-age people in China decreased by 3.45 million to 937.27 million in 2012 (ages 15 to 59).

    China’s population stood at 1.354 billion at the end of last year, increasing 6.69 million in 2012.”

    • Here’s some data from China’s National Bureau of Statistics

      China’s working age population falls
      Jan 18, 2013

      “Almost 118 boys were born for every 100 girls.

      China’s urban population rose to 712 million, up 21 million on the previous year and adding to the strains on public services, while the rural population fell 14 million to 642 million.

      Average per capita income was 26,959 yuan ($4,296) in the cities, compared to 7,917 yuan in the countryside.”

      • The U.S. with a high per capita GDP is in better position to absorb high oil prices.

        Largest oil consuming countries (bbl/day)

        1 United States 19,150,000 2010 est.
        - European Union 13,680,000 2010 est.
        2 China 9,400,000 2011 est.
        3 Japan 4,452,000 2010 est.
        4 India 3,182,000 2010 est.
        5 Saudi Arabia 2,643,000 2010 est.
        6 Germany 2,495,000 2010 est.
        7 Canada 2,209,000 2010 est.
        8 Russia 2,199,000 2010 est.
        9 Korea, South 2,195,000 2011 est.
        10 Mexico 2,073,000 2010 est.

        Chart – U.S. per capita real GDP (output = GDP = income):

        http://research.stlouisfed.org/fred2/series/USARGDPC

        • According to the BEA:

          “Even though mining was not a major contributor to real GDP growth for the nation, it was a large contributor in several states. In North Dakota, the fastest growing state in 2011, mining contributed 2.81 percentage points to real GDP growth of 7.6 percent.”

          My comment: I wonder if that includes a multiplier effect. If it doesn’t, I wonder how much that would contribute to North Dakota real growth.

    • We have to expend more resources for the same barrel of oil, because the “easy” oil is being depleted.

      Yes it is. Shale energy the bottom of the barrel and cannot produce a positive return on the energy invested. Oil and gas are a destroyer of capital and an economic loser for producing companies.

      • Let me pose a question. Net Net were the mining camps of the 19th and earlier 20th centuries such as Comstock, Cripple Creek, Tonapah, Leadville etc net consumers or producers of capital? I suspect if you look at the total impact of that industry from 1850 to 1920 it might even have produced a net negative return, all be it a good bit of physical infrastructure was built some of which remains today. But look at an old mining town and the amounts of junk laying around and consider the question. Recall that during the 19th century a western mine was described as a hole in the ground you threw money into and non came out. So I suspect that just like the airlines (and possibly the railroads as well) they were net consumers of capital. I am sure the airlines were, and given the number of bankruptcies of the railroads in waves the 1870s the 1890s, the 1930s and the `1950-1970 period it is quite likely that the railroads net net consumed capital. A lot of the lines built in the boom times are of course now gone with just the grade left.

        • Let me pose a question. Net Net were the mining camps of the 19th and earlier 20th centuries such as Comstock, Cripple Creek, Tonapah, Leadville etc net consumers or producers of capital?

          They were net producers of capital. An investment made in a shaft would be written down over the very long life of the mine, which made the actual depreciation costs very low. That is not the case with shale wells, which are useless less than a decade after they are drilled but the depreciation assumption is a life that is more than twice that length in most cases.

          I suspect if you look at the total impact of that industry from 1850 to 1920 it might even have produced a net negative return, all be it a good bit of physical infrastructure was built some of which remains today.

          You suspect wrong. I talk to analysts, geologists, and management in the mining industry each year and have had many discussions about this topic. The simple fact is that most operating underground mines would last decades and would produce more than enough to pay for the original investment. Most would operate a century or more but would never show more than a year or two of reserves because much exploratory drilling was not necessary when you can simply follow the mineralization. (The same is true today.)

          But in the case of shale the $10 million wells tend to depreciate very quickly.

          But look at an old mining town and the amounts of junk laying around and consider the question. Recall that during the 19th century a western mine was described as a hole in the ground you threw money into and non came out. So I suspect that just like the airlines (and possibly the railroads as well) they were net consumers of capital.

          As I wrote above, the product produced by mining camps paid off the investment in those camps. Once the ore was gone it was time to move on to other opportunities. In the case of the shale sector there is no payoff because there is no positive cash flow coming from shale operations.

          I am sure the airlines were, and given the number of bankruptcies of the railroads in waves the 1870s the 1890s, the 1930s and the `1950-1970 period it is quite likely that the railroads net net consumed capital. A lot of the lines built in the boom times are of course now gone with just the grade left.

          I think that you are mixed up. As I said, the wells cannot generate enough cash to pay for themselves. That makes the shale bubble very dangerous to all those that are fooled by it.

          • As indeed investing in a number of mines in the old west that were the equivalent of being salted or far overhyped. In any case due to repeal of the Sherman Silver purchase act a lot of towns folded and the mines went into chapter 11 and/or just closed (and the towns in some cases went to Ghost Towns). If you read the story of Leadville,Co you find that because of the change in demand due to the government the mines just closed, and Tabors widow survived with the remnants of the matchless mine. (This was due to the evil Gold Standard Folks of course)

  3. As indeed investing in a number of mines in the old west that were the equivalent of being salted or far overhyped.

    What exactly is your point? Yes, there were some worthless mines that were ‘salted’ to fool investors. But most operating mines made economic sense and would keep on providing wealth for generations. That is not the case for the shale industry in general where there are only a few core areas that can produce a little economic oil and gas but the rest of the formations are capital destroyers.

    In any case due to repeal of the Sherman Silver purchase act a lot of towns folded and the mines went into chapter 11 and/or just closed (and the towns in some cases went to Ghost Towns). If you read the story of Leadville,Co you find that because of the change in demand due to the government the mines just closed, and Tabors widow survived with the remnants of the matchless mine. (This was due to the evil Gold Standard Folks of course)

    This is nice history but it does nothing to advance the argument for or against shale. The simple fact is that the shale sector does not need meddling by the government to make it uneconomic because it is there already.

    • Ok so no one is forcing you to invest in the loosing industry, you could take this thesis and invest in coal for the long term. However other investors take an opposite point of view (which is the point of the market). Time will tell who looses their shirt over the issue. Unless you have investments in companies like Chesapeake that are primarily shale and not big oil which is really mostly outside the US if you look at where the revenues come from if investors want to throw their money away why do you care. You get lower electric prices for a while at least, and if they go back up well, you knew it could happen from 2008.

      • Ok so no one is forcing you to invest in the loosing industry, you could take this thesis and invest in coal for the long term.

        The argument is about the economics of shale. All I am doing is pointing out that the SEC filings are showing a massive explosion of debt and little in the way of projects that can be self financing. We have had enough data to conclude that shale gas has been a huge destroyer of capital and no data that would make us very excited about shale oil. And while I love coal I think that it makes sense to ignore the sector until the shale bust is more noticeable to the general public and until there is hope of a real recovery in the economy.

        However other investors take an opposite point of view (which is the point of the market). Time will tell who looses their shirt over the issue.

        History shows that you can make a lot of money buying crappy companies if you are in early and get out before the bubble bursts. That does not mean that the investment is a good one because of the risk you are being forced to take when you get into speculations in bubbles. If you make a correct decision on the basis of longer term fundamentals you can be wrong for some time and still get bailed out by reality. If you are in a bubble reality will work against you in the long run.

        Unless you have investments in companies like Chesapeake that are primarily shale and not big oil which is really mostly outside the US if you look at where the revenues come from if investors want to throw their money away why do you care.

        Why care? Because the capital destruction is driving profits lower and is causing companies to give away reserves that should yield much more than they do.

        You get lower electric prices for a while at least, and if they go back up well, you knew it could happen from 2008.

        I am all for cheaper electricity prices. But when they send false signals and drive malinvestments the damage done in the long term is much greater than the short term benefits.

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