The Financial Times featured an interesting article in October 2013 on the domestic oil boom, which has seen U.S. oil production increase 50 percent over the last five years. This increase in oil production has occurred at a time of high oil prices and declining natural gas prices, with firms drilling oil wells in response to the higher demand. As the Financial Times article explains, developing oil reserves that were discovered long ago is now feasible due to technological advancements in hydraulic fracturing (“fracking”), although it is still considerably more expensive than the traditional oil-drilling that is generally used in the Middle East.
But the costs of developing wells has declined for two reasons. First, ever-improving technology makes labor more efficient; for example, oil company EOG Resources claims that the time it takes to drill an oil well in the Eagle Ford Shale in Texas has declined from 15 days to 10 days over the last two years. Second, there has been overcapacity in the fracking services industry. Companies that develop oil wells purchase the services of companies that provide the high-powered pumps necessary for fracking. When the natural gas fracking boom began to take off several years ago, numerous service companies made huge capital investments in pressure pumps. But in 2012 natural gas prices declined steeply, and oil prices rose. Energy companies raced to move operations from natural gas to oil development, but could not do so at a quick enough pace to use all the capacity in the services industry. As a result, the cost of fracking services fell more than 20 percent between the first quarter of 2012 and the third quarter of 2013, and the profits of services companies declined.
What is the outlook for the domestic oil boom? Some analysts believe that production will decline as the most productive oil wells are quickly drilled, and as overcapacity in the services industry eases. But perhaps the biggest factor in whether the oil boom will continue is what happens to the price of natural gas. If the price of natural gas declines, the price of oil will likely rise and provide the demand needed to continue the boom.