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posted on 29 May 2016

Outlook For U.S. Production Of Shale Oil

from the Congressional Budget Office

-- this post authored by Mark Lasky

The Congressional Budget Office (CBO) forecasts the price of West Texas Intermediate (WTI), a type of crude oil, as part of its economic projections. 1 This paper uses that forecast to examine the outlook for U.S. production of crude oil from shale. CBO does not make a separate forecast of crude oil from shale, but understanding the outlook for that production can inform CBO's forecasts for WTI and for other variables, such as imports and business investment.

Crude oil from shale and similar formations, referred to collectively as tight oil, has had important effects on the U.S. economy over the past five years. Rising production of crude oil in four key regions (Bakken, Permian, Niobrara, and Eagle Ford), where almost all U.S. production of tight oil occurs, accounted for the dramatic increase in U.S. production of crude oil between 2010 and early 2015 (see Figure 1). That increase in production helped reduce the amount of crude oil that the U.S. imported from 9.3 million barrels per day during the first half of 2010 to 7.3 million barrels per day during the first half of 2015.

The outlook for U.S. production of tight oil is important because it affects global oil prices, the U.S. trade balance and GDP. Higher production directly boosts GDP and stimulates investment in capital used in the oil industry. The increase in U.S. production of crude oil probably contributed to the decline in global oil prices between 2011 and 2015. More recently, mining investment has fallen sharply and production of crude oil has slowed in response to a large drop in oil prices between mid-2014 and early 2016.

Two factors govern new production of tight oil: the price that drillers expect to receive when the oil is produced and mining technology. In this paper, the production of tight oil is modeled as a function of oil prices and technology so that production is projected based on a forecast of oil prices and technology. Although the amount of drilling activity is quite sensitive to the expected price of oil, both the response of drilling to the expected price and the response of total production to drilling are gradual. Consequently, a change in the price of oil induces a negligible response in total production over two to three months but a large response over two to three years. The productivity of mining has increased rapidly over the past five years and continues to grow.

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