Loren Steffy, UH Energy Scholar
The fracking boom is now officially in the rearview mirror.
On Oct. 6, U.S. Energy Secretary Jennifer Granholm told a Financial Times conference that reinstating a ban oil exports was “a tool” that the Biden Administration could use to stabilize soaring oil prices. She also hinted at the tired old saw of releasing oil from the Strategic Petroleum Reserve, another political tactic pulled straight from 2008.
Reinstating the export ban, which was lifted in 2015, may seem a logical response with oil prices rising 125 percent in the past year and topping $80 a barrel for the first time since 2014. But it also fits a pattern that raises concerns about the cost and difficulty of moving away from fossil fuels too quickly.
While the fracking boom created a lot of talk about energy independence, financial reality has put the brakes on the “drill, baby, drill” mentality. Quite simply, the U.S. can produce a lot of oil, but it can’t produce it profitably.
That realization resulted in a 34 percent production decline from U.S. shale plays by the middle of last year as companies pulled back on expansive drilling program, pledged financial discipline and vowed better returns for investors. This year, U.S. oil output is about 11.4 million barrels a day, down from 12 million in 2019, and the Energy Information Administration predicts it will fall another 100,000 barrels by year’s end.
To put all this in perspective, I contacted Jeffrey Brown, an independent petroleum geologist who has analyzed global net exports for the past 15 years.
An analysis by Hart Energy found that total U.S. oil production fell by 34 percent before the pandemic. Given the high decline rate of shale plays – which account for about 70 percent of U.S. production — Brown estimates the U.S. needs about 3.8 million barrels a day of new production just to maintain pre-pandemic output — roughly the equivalent of a new North Slope of Alaska every six months. That’s about 15 times as much oil as producers needed to generate in 2008 to offset production declines.
It’s not a new phenomenon. Production from shale wells declines much faster than from conventional ones, as the more we drill, the more we must drill just to maintain the same level of output. In the industry, it’s referred to as the “Red Queen effect,” a reference to the character in Lewis Carroll’s Through the Looking Glass who tells Alice that “it takes all the running you can do, to keep in the same place.”
That’s not even the scariest part of the equation. As Brown sees it, if the U.S. decides to ban exports once again, it will be following a global trend. Brown’s specialty is tracking something he calls “net export math,” or “resource nationalism.” Basically, it means that a country’s exports decline as domestic demand rises. Countries can maintain their export rates only if they cut their domestic consumption at the same rate or faster than the decline rate of their production. That, of course, doesn’t happen because as oil wealth grows, economies expand and domestic demand increases.
“It’s a mathematical certainty that the rate of decline in net exports will exceed the rate of decline in production and that the rate of decline in next exports will accelerate with time,” Brown said.
Mexico is a good example. From 2004 to 2019, its production fell by 50 percent — from 3.8 million to 1.9 million barrels a day. During the same period, net exports fell by 90 percent, from 2 million to 200,000 barrels a day.
Even in Saudi Arabia, skyrocketing domestic demand triggered a 5.7 percent drop in net exports between 2005 and 2019, although the kingdom’s total production rose by 9.3 percent. As oil-producing countries channel their petrodollars into economic development, their internal need for energy rises, leaving less oil and gas to export.
Meanwhile, two of the world’s most populous countries, China and India, have had a massive surge in energy demand since 2005. Their combined net oil imports rose to 14.8 million barrels a day in 2019 from 5.1 million in 2005.
Brown has tracked the combined net exports of the world’s 33 oil exporting nations since 2005. That year, global net exports peaked at 45 million to 46 million barrels a day, and they haven’t exceeded that level since. Instead, the amount of oil available for export worldwide has steadily declined. He estimates it has fallen to about 30 million barrels a day.
That’s a concern for the U.S., because we’re still importing about 5.9 million barrels, and our import needs could rise if the U.S. shale producers continue to sit on the sidelines.
We can’t expect much from the Oil Patch these days. Scott Sheffield, chief executive officer of Pioneer Natural Resources
“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” he said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies. I don’t think the world can rely much on U.S. shale.”
While some private companies may begin breaking ranks and expand drilling programs, it’s unlikely they can produce enough oil to offset the decline rates. Keep in mind the other thing the Red Queen told Alice.
“If you want to get somewhere else, you must run at least twice as fast as that!”
Quite simply, there’s less and less oil available in the world. That’s a short-term worry because we still need oil and gas to power most things, and higher commodity prices put a drag on the economy.
Renewables, of course, are touted as a solution, but unless we all get electric cars and rooftop solar panels by the end of the week, that switch isn’t going to protect our wallets from higher energy prices while we make the shift. That’s why the IEA called on energy companies to move away from oil to fight climate change, then a few weeks later implored OPEC to pump more crude.
The road to a cleaner energy future, it seems, is marked with conflicting road signs. Getting to our destination is going to be more costly — and more complicated — than it seemed even a few years ago.
“Short term, the transition to renewables is going to be vastly messier than people had been hoping,” Brown said.
Loren Steffy is a writer-at-large for Texas Monthly, an executive producer for Rational Middle Media and a managing director for 30 Point Strategies, where he heads the 30 Point Press publishing imprint. He is the author of five nonfiction books: “Deconstructed: An Insider’s View of Illegal Immigration and the Building Trades” (with Stan Marek), “The Last Trial of T. Boone Pickens” (with Chrysta Castañeda), “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet, The Man Who Thought Like a Ship,” and “Drowning in Oil: BP and the Reckless Pursuit of of Profit.” His first novel, “The Big Empty,” was published in May 2021.
Steffy is the former business columnist for the Houston Chronicle and previously was the Dallas (and Houston) bureau chief and a senior writer for Bloomberg News. His award-winning writing has been published in newspapers and other publications worldwide. He has a bachelor’s degree in journalism from Texas A&M University.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.