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When Will U.S. Crude Oil Production Peak?

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As recently as the mid-2000s, conventional wisdom held that U.S. crude oil production was in secular decline, while the nation's demand for oil was expected to keep rising.

But over the past five years, U.S. oil production has surged by more than 50%, while domestic demand has been more or less stagnant. Now, policymakers are less concerned than they were a decade ago about the nation's reliance on foreign oil and are even debating the prospects of exporting crude oil from the United States.

It's all thanks to the application of advanced drilling techniques such as horizontal drilling and hydraulic fracturing that have allowed energy companies to tap previously unreachable shale formations in places like Texas and North Dakota. But even though production from these shale formations has surged in recent years, it will eventually peak at some point. The question is when exactly.

Is U.S. crude oil production nearing a peak?
In a recent note, the U.S. Energy Information Administration, or EIA, offered up its prognostications, projecting that U.S. oil production will peak by 2019.

The agency expects U.S. crude oil output to grow by an annual 800,000 barrels per day through 2016, when it will reach 9.5 million barrels per day. After that, production growth will slow substantially, reaching a peak of 9.61 million barrels per day in 2019 -- close to an all-time record high of 9.64 million barrels per day achieved in 1970 -- the agency said.

Meanwhile, growth in domestic crude oil demand is forecast to remain sluggish, allowing the country to meet an increasing share of its needs through domestic production. Just last month, U.S. oil imports fell to their lowest level since 1998 and are expected to remain in general decline after reaching a peak in 2005. By 2019, the EIA forecasts that domestic production will meet 63% of domestic demand, up from just 38% in 2011.

Key drivers of U.S. production growth
This drastic reversal in U.S. oil imports is thanks to surging production from shale formations, where companies continue to deliver staggering growth, even as they slash operating costs.

Take the Bakken, for instance, where oil production has nearly quadrupled over the past four years, surging from roughly 250,000 barrels a day in late 2009 to roughly 940,000 barrels per day in October. At the same time, the Bakken rig count has actually declined over the past year, as companies use techniques such as multi-well pad drilling and downspacing to cut costs and coax more oil from the play.

Continental Resources (NYSE: CLR  ) , for instance, grew third-quarter net Bakken production by 7% sequentially to 94,500 barrels of oil equivalent per day, while Kodiak Oil & Gas (NYSE: KOG  ) delivered more than a 50% sequential increase in average daily Bakken sales volumes. Meanwhile, Continental's well costs have plunged from $9.2 million last year to roughly $8 million during the third quarter, while Kodiak's have fallen from $12 million in 2012 to just under $10 million currently.

Similarly, in the Eagle Ford, ConocoPhillips (NYSE: COP  ) reported a whopping 66% year-over-year production increase during the third quarter, while Chesapeake Energy (NYSE: CHK  ) said its Eagle Ford production surged 82% from the comparable quarter last year. Like Kodiak and Continental, both firms have also reported meaningful reductions in well costs and drilling times, thanks to pad drilling and other initiatives.

The bottom line
The U.S. shale oil boom made possible by companies like Continental Resources, Kodiak Oil & Gas, ConocoPhillips, and Chesapeake Energy has undoubtedly been one of the most significant global energy developments in recent years. Not only has it radically transformed global energy markets by boosting supply, but it has also helped improve the U.S. trade balance and supported millions of jobs.

However, there remains a great deal of uncertainty over how long the boom will last. Factors such as shale well decline rates, technological improvements that boost recoverable resource estimates, regulatory and tax regime changes for oil producers, and investment in oil storage and transportation infrastructure could all have a meaningful impact on when U.S. oil production will peak.

But most importantly, a sustained decline in crude oil prices could render certain projects uneconomical, resulting in decreased investment and production. All told, there are simply far too many uncertain variables to reliably determine when exactly U.S. crude oil production will peak, though the EIA projections provide a useful reference point.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2014, at 11:09 PM, ralfyman wrote:

    Also, oil producers will generally sell to the highest bidders, which means the effects of peak oil may be felt even before production drops, i.e., if global oil demand cannot be met.

  • Report this Comment On January 06, 2014, at 12:06 PM, platinumshore wrote:

    This is quite an amusing article - the question has been asked "When Will U.S. Crude Oil Production Peak?".. and I can give an answer with reasonable confidence based on optimistic growth figures on shale and tight oil based on sweet spots.

    US oil production peaked in 1970 at 11.32mb/d

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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