Apr 27 2023
Why isn't US oil production growing faster despite high prices and windfall profits?
It's a loaded question with a heavily political overtone, but a crucial one for the worldwide petroleum complex since incremental US onshore barrels first transformed and then dominated oil price formation for the past decade. Thus, the seeming evaporation of US onshore supply elasticity, compounded by the pandemic recovery and the war in Ukraine, has plunged the oil market into a search not only for an equilibrium price, but also for a new mechanism for sourcing and pricing marginal barrels.
In answering this question, there's a straightforward, factual answer and a more complex, structural one that delves deeper into the near-perfect alignment of incentives to restrain investment within the US oil sector well beyond the near-term.
Straightforward answer: The oil system has reached its short-term speed limit. The industry is simply not bringing enough wells onstream due to logistics, labor, and supply chain bottlenecks. Slower growth is (now) less an explicit objective for producers than a by-product of operational realities. In addition, there are factors that are relevant but that are not driving the train of underwhelming near-term onshore production: shifting decline rates, new well productivity, sweet spot exhaustion, infrastructure constraints, and government policy.
More complex, structural answer: The inability to spend has been replaced by the unwillingness to spend. All of the key players—oil and gas companies, equity markets, and commodity markets—distrust the current upcycle. Longer-term, concerns related to the impact of the energy transition on the viability of oil and gas have changed the calculus of investors and companies regarding certain oil and gas investments. The impact of this "strand" risk on onshore US shale assets is lower than it is on longer-cycle assets globally. But the same is not true for the oilfield service sector, whose reticence to aggressively fund new, durable equipment is also retarding the normal investment mechanism. Importantly, there is no impetus to act quickly: the status quo is very sustainable across the oil and gas supply chain.
The most likely outcome, in our view, is that the current impasse does not get resolved. Rather, we muddle through, meaning that US production growth gets stuck in a range of 0.6-1.0 MMb/d in 2023 and 2024, regardless of policy intervention or upward price momentum, though certainly there is always downward risk