The History of Oil Production in the U.S.

The Russian attack on Ukraine has led to a lot of upheaval in the oil and gas industry worldwide. In this clip from "The High Energy Show" on Motley Fool Live, recorded on March 15, Fool.com contributors Matt DiLallo, Travis Hoium, and Jason Hall examine the disruption in the U.S. and also look at the past 10-12 years which show how a reduction in exploration has led to a lack of oil inventory for the country.

Matthew DiLallo: I think OPEC is one source that as Jason mentioned, the spare capacity, they're still not back up to where they were. I believe they just added 400,000 barrels a day to the global market. I can't remember off the top of my head where they were and what they've got left to go, but they've been on this steady pace of bringing oil back as demand has come back.

There's definitely some just getting back to where they were. I think Saudi Arabia keeps like a couple hundred thousand barrels a day of capacity available. There's that little cushion there and some other countries, and it's based on how they produce oil.

Saudi Arabian oil is much easier to just bring online because of the dynamics of the well, but in the United States, as we talked about the decline rate of an oil well, it will produce like 90% of its production in the first year and then go to nothing. It's really drill and replace, drill and replace, drill and replace. That's a lot of what they're doing.

According to The Wall Street Journal, it had an article the other day that the five biggest shale companies have about a decade of really good wells if they can drill and replace and maybe grow production 1-2% a year and that's EOG Resources (EOG 0.05%), Devon Energy (DVN -0.26%), Diamondback Energy (FANG 0.08%), Continental Resources (CLR), and Marathon (MPC -1.22%) they're the five biggest shale players.

You can probably through on ConocoPhillips (COP -0.03%) in there, they've got a really good business, but they're not in the position because they look out a decade or more where they can just like, "Hey, let's take advantage of this market." If they did that and what The Wall Street Journal's analysts found is they decided if they want to grow production 15% a year to like take advantage of the high prices, they would dwindle their inventory to six years and you can't run your business that way.

These companies are taking this big long-term mindset, they're just isn't the inventory unless they start doing some more exploration like there's places the Powder River Basin out in Wyoming. They know that there's oil there is accessible. There's some places in the Gulf Coast, but they need to do a lot of exploration. That the first thing that gets cut when oil prices go down, they got to make money on their production. They'll cut out all these extras and exploration is a big thing.

Travis Hoium: That's basically not been happening over the last eight years, is that what you're saying?

DiLallo: Yeah. Some companies are like EOG Resources they're one of the big players in exploration, they've continued to do that. I know they've found some oil in some places, but you're really not seeing a lot of exploration. If my memory serves me correct, last year was like the worst year since World War I or II for oil discoveries in the world.

We just didn't find a lot of oil because we're not looking for it. You also have a lot of the companies that were out there looking for oil your BPs (BP -0.66%), your Exxons (XOM -3.00%), Chevrons (CVX -0.50%) they were the big offshore players. BP is shifting to wind and renewables and so is TotalEnergies (TTE 1.00%) and some of the others that was their big game was doing that. You're just seeing so many companies pivot. We're just not looking for oil.

Where we do have oil like Canada, there's a ton of oil in Canada, they just can't get it because it's much more higher carbon to burn that oil. Some environmentalists have really been pushing back against that, mainly through pipelines. Obviously, we've heard so much about the Keystone XL, there's a Trans Mountain pipeline and expansion. We just haven't been able to build the pipelines that would allow these companies to tap into this oil.

The easy friendly oil we can't get to and we've seen that in the news, returning to Iran, returning to Venezuela because they have oil, they have a lot of it, they just haven't been like sanctions have kept them back and Venezuela just mismanagement. It's just there's no easy solution, there is no quick answer to this problem.

Jason Hall: I want to share a chart here because I think this puts it in context too. Let's talk about some of the actual mechanics, the picks and shovels as they say. This is onshore rigs that are targeted specifically at oil. The number keeps going up, but again compared to where we were, it's well down.

I'm going to go even further back. Now there's some caveats here. A lot of the rigs that are operating today are so much better than the rigs that we're operating in 2010, 2012, 2013. They're just far more powerful, they're more flexible and they can be moved and set up so much more quickly. They are far more productive assets, but again we're still just looking at three years ago we're down.

The thing is a lot of these rigs that were dropped off the market weren't just taken out of operations, they were retired, they were scrapped. Part of it is the industry still needs to build and it takes time to build them. They're very expensive, millions and millions of dollars, and they're large and they're complex.

Hoium: That's why the E&P companies need to make the commitment to spend over multiple years so that companies like Halliburton will build.

Hall: It's the chicken or the egg. This is gas rigs, it's a little bit of the same thing. This is the chicken or the egg part, this was a tweet that I wanted to share that really gets to a lot of the nuts and bolts of why has the industry become far more disciplined as Matt was talking about. A lot of it was because it didn't have any choice.

I'm going to read these numbers here. Between 2015 and 2021, $320 billion of defaults. That's private equity and banks lending into the oil patch. Then companies that have gone bankrupt, private companies that failed, $500-$700 billion of equity losses. You're looking at a trillion dollars of capital destruction over the past six or seven years.

A lot of that was because of the drill baby drill years. Where there were easy money and anybody with any experience that had put together a good sales pitch could raise money and then go drill oil, and prices continued to go down and the answer to every problem was drill more wells. The run-up of oil in the U.S. was a result of that and we all benefited from lower oil prices, but it absolutely devastated the industry.