A Free-Market Energy Blog

Minerals as Manufacturing: The Case of Oil and Gas

By Robert Bradley Jr. -- August 1, 2018

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

–  Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

The above quotation from one of my mentors goes a long way to explain the paradox of how “fixed” mineral supply (gold, silver …. oil, gas) expand rather than contract in a global free market.

A back-page current from the Wall Street Journal–just business-as-usual in the industry and in reporting–reminded me of Professor DeGregori’s insight. Spencer Jakab’s “The New Tech That Terrifies OPEC” (June 2/3, 2018) reported these advances in regard to the Texas-New Mexico Permian Basin, whose 3.1 million daily barrels of oil would put it as number four among OPEC’s 14 members.

The amount of oil being pulled from the ground there is already driving global markets. But what should really frighten energy ministers in Riyadh, Tehran and Moscow is how that oil is produced. The number of drilling rigs now active in the Permian is the same as back in October 2011, yet the region is producing three times as much crude.

Better technology and best-practices are at work. H explains:

Just a few years ago, a well would be drilled and then the rig would be disassembled and moved to a new location—a time- and labor-intensive process. Today it is more common for rigs to sit on giant pads, which host multiple wells and the necessary infrastructure, and for them to move on their own power to a new well yards away. These rigs drill over a wider area and increasingly are being guided by instruments developed for offshore drilling that see hundreds of feet into the rock. They inject more sand underground to break open the rocks, boosting output.

Those small gains add up. Between 2010 and 2016, the average number of drilling days per rig including transport time fell at a pace of about 8% a year in the Midland section of the Permian, while initial well production grew by 33% in just two years, according to McKinsey Energy Insights.

More oil, less cost, more resilience to price swings.

The efficiency and drilling intensity is clear from just one site owned by Encana. The pad in the Permian started out with 14 wells, recently had 19 more added to it and may reach 60 wells—a once unimaginable concentration.

That also may make America’s reserves last longer. Encana’s approach, which it calls “the cube,” targets different layers simultaneously, which can boost the amount that can be recovered economically by about 50%, Mr. Suttles said.

The efficiency gains mean that even an epic price decline won’t halt activity at the best fields. What’s more: The industrial scale of U.S. drilling means that companies able to write big checks and handle complex logistics are driving the market. They are less likely to feel true financial distress during the next pullback.

This oil is not going away whatever OPEC decides to do.

Producers reckon that the core of the Permian is still profitable in the high $30-to-mid-$40-a-barrel range for U.S. benchmark crude, now trading around $66 a barrel. According to the International Monetary Fund, not a single Middle Eastern OPEC country can finance its budget at Brent crude below $40 a barrel.

The author concludes:

OPEC, a cartel out to maximize its profit, talks a lot about bringing “balance” to the oil market. The bust they helped engineer left that balancing point at a price they will find it hard to live with.


  1. rbradley  

    Another quotation confirming DeGregori in today’s WSJ: “… as the oil-and-gas business becomes more like manufacturing and less like wildcatting….” (Spencer Jakab, “Not Enough Gas in Exxon’s Tank,” p. B12.)


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