I've just finished a new paper on Oil prices, exhaustible resources, and economic growth (click here for paper), which explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed. Below I reproduce the paper's summary of the history of oil production from individual U.S. regions.
From Oil prices, exhaustible resources, and economic growth:
Certainly the technology for extracting oil from beneath the earth's surface has evolved profoundly over time. Although Drake's original well was steam-powered, some of the early drills were driven through rock by foot power. Figure 2 illustrates one approach based on a spring-pole. The workers would kick a heavy bit at the end of the rope down into the rock, and spring action from the compressed pole would lift the bit back up. After some time at this, the drill would be lifted out and a bucket lowered to bail out the debris. Of course subsequent years produced rapid advances over these first primitive efforts-- better sources of power, improved casing technology, and vastly superior knowledge of where oil might be found. Other key innovations included the adoption of rotary drilling at the turn of the century, in which circulating fluid lifted debris out of the hole, and secondary recovery methods first developed in the 1920s, in which water, air, or gas is injected into oil wells to repressurize the reservoir and allow more of the oil to be lifted to the surface.
Figure 2. Drilling for oil with a spring-pole. Source: American Oil and Gas Historical Society.
Figure 3 plots the annual oil production levels for Pennsylvania and New York, where the industry began, from 1862 to 2010. Production increased by a factor of 10 between 1862 and 1891. However, it is a mistake to view this as the result of application of better technology to the initially exploited fields. Production from the original Oil Creek District in fact peaked in 1874 (Williamson and Daum, 1959, p. 378). The production gains instead came primarily from development of new fields, most importantly the Bradford field near the Pennsylvania-New York border, but also from Butler, Clarion, and Armstrong Counties. Nevertheless, it is unquestionably the case that better drilling techniques than used in Oil Creek were necessary in order to reach the greater depths of the Bradford formation.
Figure 3. Annual crude oil production (in thousands of barrels per year) from the states of Pennsylvania and New York combined.
One also sees quite clearly in Figure 3 the benefits of the secondary recovery methods applied in the 1920s, which succeeded in producing much additional oil from the Bradford formation and elsewhere in the state. However, it is worth noting that these methods never lifted production in Pennsylvania back to where it had been in 1891. In 2010-- with the truly awesome technological advances of the century and a half since the industry began, and with the price of oil 5 times as high (in real terms) as it had been in 1891-- Pennsylvania and New York produced under 4 million barrels of crude oil. That's only 12% of what had been produced in 1891-- 120 years ago-- and about the level that the sturdy farmers with their spring-poles were getting out of the ground back in 1868.
Although Pennsylvania was the most important source of U.S. oil production in the 19th century, the nation's oil production continued to increase even after Pennsylvanian production peaked in 1891. The reason is that later in the century, new sources of oil were also being obtained from neighboring West Virginia and Ohio (see Figure 4). Production from these two states was rising rapidly even as production from Pennsylvania and New York started to fall. Ohio production would continue to rise before peaking in 1896, and West Virginia did not peak until 1900.
Figure 4. Annual crude oil production (in thousands of barrels per year) from the states of Pennsylvania and New York combined (top panel), Ohio (middle panel), and West Virginia (bottom panel).
These four states together accounted for 90% of U.S. production in 1896, with the peak in production from the region as a whole coming that year (see Figure 5). Overall U.S. production declined for a few years with falling supplies from Appalachia, but quickly returned to establishing new highs in 1900, thanks to growth in production from new areas in the central United States, details of which are shown in Figure 6. Note the difference in scale, with the axes in Figure 6 spanning 6 times the magnitude of corresponding axes in Figure 4. Each of the regions featured in Figure 6 would eventually produce far more oil than Appalachia ever did. These areas began producing much later than Appalachia, and each peaked much later than Appalachia. The combined production of Illinois and Indiana peaked in 1940, Kansas-Nebraska in 1957, the southwest in 1960, and Wyoming in 1970.
Figure 5. Combined annual crude oil production (in thousands of barrels per year) from the states of Pennsylvania, New York, West Virginia, and Ohio.
Figure 6. Annual crude oil production (in thousands of barrels per year) from assorted groups of states in the central United States.
Far more important for U.S. total production were the four states shown in Figure 7, which uses a vertical scale 2.5 times that for Figure 6. California, Oklahoma, Texas, and Louisiana account for 70% of all the oil ever produced in the United States. Production from Oklahoma reached a peak in 1927, though it was still able to produce at 80% of that level as recently as 1970 before entering a modern phase of decline that now leaves it at 25% of the 1927 production levels. Texas managed to grow its oil production until 1972, and today produces about a third of what it did then. California production continued to grow until 1985 before peaking. The graph for Louisiana (bottom panel of Figure 7) includes all the U.S. production from the Gulf of Mexico, growing production from which helped bring the state's indicated production for 2010 up to a value only 33% below its peak in 1971.
Figure 7. Annual crude oil production (in thousands of barrels per year) from 4 leading producing states. California includes offshore and Louisiana includes all Gulf of Mexico U.S. production.
Figure 8 plots production histories for the two regions whose development began latest in U.S. history. Production from Alaska peaked in 1988. North Dakota is the only state that continues to set all-time records for production, thanks in part to use of new drilling techniques for recovering oil from shale formations. To put the new Williston Basin production in perspective, the 138 million barrels produced in North Dakota and Montana in 2010 is about half of what the state of Oklahoma produced in 1927 and a fifth of what the state of Alaska produced in 1988. However, the potential for these fields looks very promising and further significant increases from 2010 levels seems assured.
Figure 8. Annual crude oil production (in thousands of barrels per year) from Alaska (including offshore), North Dakota, and Montana.
The experience for the U.S. thus admits a quite clear summary. Production from every state has followed a pattern of initial increase followed by eventual decline. The feature that nonetheless allowed the total production for the U.S. to exhibit a seemingly uninterrupted upward trend over the course of a century was the fact that new, more promising areas were always coming into production at the same time that mature fields were dying out (see Figure 9). Total U.S. production continued to grow before peaking in 1970, long after the original fields in Appalachia and the central U.S. were well into decline.
Figure 9. Annual crude oil production (in thousands of barrels per year) from entire United States, with contributions from individual regions as indicated.
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And the decline in production from both individual regions within the U.S. as well as the United States as a whole has come despite phenomenal improvements in technology over time. Production from the Gulf of Mexico has made a very important contribution to slowing the rate of decline over the most recent decade. Some of this production today is coming from wells that begin a mile below sea level and bore from there through up to a half-dozen more miles of rock-- try doing that with three guys kicking a spring-pole down! The decline in U.S. production has further come despite aggressive drilling in very challenging environments and widespread adoption of secondary and now tertiary recovery methods. The rise and fall of production from individual states seems much more closely related to discoveries of new fields and their eventual depletion than to the sorts of price incentives or technological innovations on which economists are accustomed to focus.
Notwithstanding, technological improvements continue to bring significant new fields into play. The most important recent development has been horizontal rather than vertical drilling through hydrocarbon-bearing formations accompanied by injection of fluids to induce small fractures in the rock. These methods have allowed access to hydrocarbons trapped in rock whose permeability or depth prevented removal using traditional methods. The new methods have enabled phenomenal increases in supplies of natural gas as well as significant new oil production in areas such as North Dakota and Texas. Wickstrom, et. al. (2011) speculated that application of hydraulic fracturing to the Utica Shale formation in Ohio might eventually produce several billion barrels of oil, which would be more than the cumulative production from the state up to this point. If that indeed turns out to be the case, it could lead to a third peak in the graphs in Figure 4 for the Appalachian region that exceeds either of the first two, though for comparison the projected lifetime output from Utica would still only correspond to a few years of production from Texas at that state's peak.
Obviously price incentives and technological innovations matter a great deal. More oil will be brought to the surface at a price of $100 a barrel than at $10 a barrel, and more oil can be produced with the new technology than with the old. But it seems a mistake to overstate the operative elasticities. By 1960, the real price of oil had fallen to a level that was 1/3 its value in 1900. Over the same period, U.S. production of crude oil grew to become 55 times what it had been in 1900. On the other hand, the real price of oil rose 8-fold from 1970 to 2010, while U.S. production of oil fell by 44% over those same 40 years. The increase in production from 1900 to 1960 thus could in no way be attributed to the response to price incentives. Likewise, neither huge price incentives nor impressive technological improvements were sufficient to prevent the decline in production from 1970 to 2010. Further exploitation of offshore or deep shale resources may help put U.S. production back on an upward trend for the near term, but it seems unlikely ever again to reach the levels seen in 1970.
My paper goes on to discuss trends in world oil production since 1973, and draws on the economic experience of historical episodes of temporary oil supply disruptions to consider the possible implications if global oil production were to soon reach a peak as well.
By. James Hamilton
Reproduced from Econbrowser
