No one in this industry has a crystal ball, but even so, it’s helpful sometimes to ask, and
try to anticipate, where things are headed.
The Permian Basin oil field has had a high level of activity for the last three years. This high level of activity has brought a number of positive effects on the region and a few negatives. It has resulted in low unemployment, significant increases in personal incomes, increases in retail sales and sales tax revenues, and increased total employment. Some of the negatives are a qualified labor force shortage, a housing shortage, and busy streets and roads with resulting increases in wear and tear and accidents. Overall, most would agree that the high activity is preferred over some of the slow times the Permian Basin has experienced in the past.
I am often asked “How long will this boom last?” Making such a prediction is hazardous to one’s health. I don’t even like using the “B” word. However, there are certain key factors which help us better understand the complexities that drive our economy. I believe there are two key components that are necessary to sustain the high level of activity in the Permian Basin. The first I have addressed in prior articles and that is a large resource base to sustain drilling. I believe the combination of hydraulic fracturing and horizontal drilling and the oily Permian Basin provide a large unconventional resource base that will sustain drilling in the Permian Basin for years to come. The second necessary factor is sustained oil prices. Because of the high capital costs to drill and complete these wells, high oil prices, preferably above $90/bbl, are necessary.
Predicting oil prices is where it gets treacherous because there are so many factors known and unknown that affect oil prices. In spite of these difficulties, I will outline some of the current factors. Oil is one of the most liquid commodities traded on earth. Supply and demand are very complex and we are usually caught off-guard when imbalances occur that radically change the price of oil.
On the supply side, one of the most surprising changes has been the rapid increase in oil production in the United States since 2007. In 2007, U.S. crude production was below 5 million bpd. It is currently about 6.8 million bpd, an increase of 36 percent. This is a result of the unconventional resource plays, namely the Bakken, Eagle Ford, and Permian Basin. When I first saw this large increase, I was alarmed that we would oversupply the global market with oil just as producers in the United States have oversupplied the domestic market with natural gas. However, the non-OPEC countries excluding the US and Canada are fighting significant declines in old oil fields. Particularly in the North Sea, in Mexico, and in parts of Asia and Brazil. These declines largely offset the gains in the U.S. and Canada. OPEC appears to be near capacity, especially with the political turmoil in the Middle East. Changes in the political environment could cause significant disruptions or increased supply.
On the demand side, the global economy is the biggest factor. A forecast 3 percent increase in global GDP generally translates to a 1 percent increase in crude oil demand, or about 900 thousand bpd. While the United States, Europe, and other economically developed countries are expected to experience sluggish economies for the next year or beyond, the emerging markets lead by China and other Asian and Latin American economies are expected to drive the demand for crude oil. I believe the economy is the biggest risk to oil demand and resulting oil prices.
The bottom line is no one really knows how long this high level of activity will last. However, it is a great time to be in the industry and the future looks bright. The Permian Basin Petroleum Association is working hard to protect this industry that is so important to the Permian Basin and Texas.