I’ve been reporting on the Great American Energy Boom for several years now, and have featured charts like the one above showing the combined crude oil production in America’s three super-giant oil fields: Bakken, Eagle Ford and Permian Basin (updated with new EIA production forecasts through September). Each of those oil fields now produce more than one million barrels per day, joining an elite group of only ten oil fields in the history of the world that have ever produced at that level at peak production. Remarkably, the combined oil output in the Bakken, Eagle Ford and Permian Basin has increased more than four-fold in less than 8 years, from 1 million barrels per day in 2007 to an estimated 4.4 million barrels per day in September.
One question that I hear all the time on this topic is this: With the huge increases in US crude oil output from the shale revolution, why is oil still around $100 per barrel and why is gasoline so expensive?
The answer is pretty straightforward: Oil is a global commodity whose market price is largely determined by two important market-based factors: a) global oil supply and b) global oil demand. The chart below helps to explain.
Updated with Nominal GDP: Between 2004 and 2013, the world oil supply has increased only 4.6% from 72.58 million barrels per day to 75.94 million barrels per day last year (EIA data here), while world real GDP has increased by 24.2% from $44.52 trillion to $55.3 trillion (in 2005 dollars, USDA data here) and world nominal GDP increased by almost 64% from $43.1 trillion to $70.6 trillion.
Bottom Line: The significant increases in US crude oil output over the last ten years haven’t increased the world supply of oil nearly enough to impact world oil production enough to offset the significant 24.2% increase in global economic activity. World demand for oil and energy is up significantly, while the supply of oil has barely increased. Therefore, oil prices and US gas prices haven’t come down much. We should probably be thankful though because without the significant increases in US oil production, oil and gas prices would probably be higher than they are today.
Update 2: See related CD post from a few months ago: “You can thank two outdated, anti-consumer, protectionist US trade policies for some of your ‘pain at the pump’” that explains how the Jones Act and the ban on crude oil exports have contributed to higher gasoline prices.