Production flows from a given oil field naturally decline over time, but we keep trying harder and technology keeps improving. Which force is winning the race?
An oil reservoir is a pool of hydrocarbons embedded and trapped under pressure in porous rock. As oil is taken out, the pressure decreases and the annual rate of flow necessarily declines. A recent study of every well drilled in Texas over 1990-2007 by Anderson, Kellogg, and Salant (2014) documents very clearly that production flows from existing wells fall at a very predictable rate that is quite unresponsive to any incentives based on fluctuations in oil prices.
Average monthly production from Texas wells drilled in indicated period as a function of months since well completion. Source: Anderson, Kellogg, and Salant (2014).
If you want to produce more oil, you have to drill a new well, and in contrast to production from existing wells, drilling effort clearly does respond to price incentives.
Number of new wells drilled in Texas each month (in green) and price of crude oil (black). Source: Anderson, Kellogg, and Salant (2014).
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When a given region is found to be promising, more wells are drilled, and production initially increases. But eventually the force of declining pressure takes over, and we see a broad decline in oil production from a given producing region that additional effort and price incentives can do little to reverse. For example, production from the North Sea and Mexico, which had been quite important in the world total in 2000, have been declining steadily for the last decade despite a huge increase in the price of oil.
Oil production from the North Sea and Mexico, Jan 1973 to March 2014. Top panel: combined field production of Norway and the United Kingdom in thousands of barrels per day, from EIA, Monthly Energy Review, Table 11.1b.Bottom panel: sum of Norway, U.K., and Mexico production as a percent of world total. Reproduced from Hamilton (2014).
It’s also interesting to look at graphs for each of the oil-producing U.S. states. Production from Pennsylvania, where the oil industry began in 1859, peaked in 1891, and in 2013 was at a level only 1/6 of that achieved in 1891. But despite falling production from Pennsylvania after 1891, U.S. production continued to increase, because of the added boost from Ohio (which peaked in 1896) and West Virginia (which peaked in 1900). And so the story continued until 1970, with total U.S. production continuing to increase despite declines from the areas first exploited.
Annual production (in mb/d) from 18 U.S. states that peaked earliest, 1860-2013. Source: Hamilton (2014).
Annual production (in mb/d) from 13 U.S. states with later peak dates, 1860-2013. Source: Hamilton (2014).
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Use of horizontal drilling methods in the Bakken and Niobrara shales brought production in North Dakota and Colorado to all-time highs in 2013. Production was also higher in 2013 than in 2005 for 22 of the 31 states graphed above, though 2013 levels were still below the historical peak for all but 3 of these states.
Another perspective on the U.S. trends comes from looking at broader categories of production. The red area in the graph below summarizes field production of conventional crude oil from the lower 48 U.S. states. This peaked in 1970, and today is 5.5 mb/d below the value achieved then. Factors temporarily slowing the trend of declining production were development of offshore oil (in dark blue) and Alaska (in light blue). But the combined contribution of all three of these has nevertheless been falling steadily for the last 20 years.
U.S. field production of crude oil, by source, 1860-2013, in millions of barrels per day. Source: Hamilton (2014).
That downward trend was dramatically reversed over the last few years with the advent of horizontal drilling and fracturing to get oil out of tighter geologic formations, as seen in the green region in the graph above. If success with tight oil formations continues, we may yet see the historical peak production of many of the states above eventually exceeded, and indeed perhaps even for the United States as a whole.
But it’s also worth noting that as we moved through the succession of colors in the graph above we have been turning to increasingly more expensive sources of oil. Today’s frackers would all be put out of business if we were to return to the oil prices of a decade ago.
And even if prices remain high or go higher, eventually that green curve is going to turn around and start falling with the others.
By James Hamilton of Econbrowser