Here’s an early sign for all of the folks like Dick Durbin who are insisting that now is the time to raise gas taxes while prices are low. While I’ve tried (apparently in vain) to warn that this was going to happen, the good times of continually decreasing energy prices aren’t going to last forever. Market analyst John Kemp has examined the current domestic oil and gas supply chain to establish some baseline projections regarding volume over the next year or two. The results are great for the consumer in the short term, but the invisible hand of the market never goes away, and things will taper off before too long.
Unless prices recover, U.S. oil production will start falling before the end of 2015 as new drilling is insufficient to replace declining output from wells completed in 2013 and 2014.
Future production depends on the rate of decline from existing wells (known as the decline curve) and the average age of old oil wells as well as the number of new ones drilled and their productivity…
In the short term, U.S. oil production is set to continue rising because there is still a backlog of wells waiting for fracturing crews and completion after the record drilling during the first ten months of 2014… As these wells are completed, there will be a significant increase in reported output because newly completed wells yield extremely high rates of production in the first few days and months after starting to flow.
But as the backlog is cleared, production will plateau and then start to fall, as new drilling and completions fails to keep up with the declining output from older wells.
I have little doubt that we’ll see all sorts of conspiracy theories arising from the anti-energy Left who are always willing to ascribe Lex Luthor levels of evil genius to “Big Oil” but there is actually nothing going on here beyond normal market forces and the supply to demand ratio. Kemp goes into all the numbers, but the layman’s explanation is fairly simple. When the price that the market will bear for oil drops below a certain level it becomes unprofitable to drill new wells and produce more oil at home, This is because the costs associated with starting up a new well do not decrease with the sale price of the product. But that effect isn’t felt all at once. A new well will produce like gangbusters for a few months, then taper off over the next couple of years. Even if it makes no sense to drill more wells for the next six months, the existing ones you are finishing up will keep producing and flooding the market through next winter. That will keep the prices down.
After that, however, the extant wells will begin to tap out. Without new wells waiting to come on line, the supply goes down. The demand will remain the same or increase, so the price will go back up. At that point it will once again become profitable to drill and the cycle repeats. But don’t tell that to Dick Durbin. He’ll be taxing the gasoline all through this wild ride if he gets his way.