What Could Lower Prices Mean For U.S. Oil Production?

April 7th, 2015
in econ_news

from the Kansas Fed

Oil prices have declined sharply since the summer of 2014, raising questions about whether the boom in oil and gas production can continue. Since 2005, U.S. oil and gas production has increased more than 50 percent. The share of oil and gas in private fixed investment increased from 2.9 percent in 2005 to 5.8 percent in 2013.

Follow up:

With oil prices at about half their summer 2014 level, will the investment continue to be profitable and boost production? The dramatic increase in production post-2005 became possible when high and rising energy prices allowed two complementary but expensive technologies - multistage hydraulic fracturing and horizontal drilling - to be applied on a large scale for the first time. Energy producers were able to access previously untapped reservoirs using the newly profitable technologies, first in shale gas fields such as the Barnett field of east Texas, and then in tight oil fields such as the Bakken in North Dakota.

Since 2011, over 95 percent of the growth in U.S. oil and gas production has come from these unconventional sources. To continue this growth, however, energy prices must remain high enough to justify the costs of extraction. Shale fields require significant drilling activity and thus significant ongoing capital investment to increase, much less maintain, production levels. Moreover, the cost of an unconventional well could be as high as five times the cost of a conventional well.

[click on image below to continue reading]

Source: http://kansascityfed.org/publicat/econrev/pdf/15q1CakirMelek.pdf

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