Volatility of the price of oil has been the norm for quite some time. The pandemic and its disruption of supply chains impacted the cost of oil barrels; however, declining demand did as well. More recently, global conflicts have made waves within the oil industry–specifically, the Russian invasion of Ukraine and subsequent political actions. Now, the crisis in the Middle East is affecting businesses in the oil industry. All the while, OPEC and other price-setters negotiate their best position. Throughout this time, U.S. oil production expanded, keeping prices somewhat in check. But based on forecasts for U.S. oil production in 2024, these protections may soon fade.
The recent U.S. oil production growth over recent years has been fueled by a number of private producers. This has led to a shale boom that has seen progressive U.S. oil production growth consistently year after year. But a number of events has taken place this year that suggest this boom in growth may be coming to an end. Acquisitions, declining shale reserves, and shifting preferences on shareholder value all play a role in these changes. While some are hopeful that this won’t be the case, most analysts expect U.S. oil production in 2024 to slow. Given the continued demand for oil in the country, this could have major impacts on oil prices in the coming months to years.
U.S. Oil Production Growth by the Numbers
U.S. oil production growth annually has been substantial. Even in 2023, domestic oil production grew by 1 million barrels daily. In fact, early in 2023, production figures were on pace to reach 12.9 million barrels of oil a day, which would have reached record numbers. However, as the year progressed, these number declined. Based on this decline, forecasters suspect the U.S. oil production in 2024 will be noticeably less. As per current production levels, growth will likely be closer to 170,000 barrels a day for 2024. This represents a big drop in growth, which could lead to higher prices at the pump. That of course depends on domestic demand for oil.
The reason for the decline in U.S. oil production stems from a pullback in small producer activities. In this regard, the number of oil rigs domestically dropped by about 20% in the last year. This leaves the number around 500 total. Some of this decline was related to the fact that shale oil production tends to provide the greatest output early in its life. Thus, in order to continue robust growth, new rigs and oil wells must constantly increase year over year. However, as shale reserves have fallen, opportunities for new wells appear to be somewhat declining. A larger issue relates to the changing economics and business strategies within the industry. This is perhaps a more important factor when projecting U.S. oil production in 2024.
Shifts in the Oil Industry
While reduced shale oil does play a role in the decline of U.S. oil production growth, industry shifts do as well. In recent months, there have been several acquisitions of the smaller private producers by larger public companies. The incentive for this has been for these larger companies to gain a bigger footprint in the U.S. oil market. But typically these acquisitions result in lower oil production. Public companies are less inclined to invest in new rigs for shale oil production in the U.S. The cost associated with these endeavors are often significant, and they do not necessarily benefit shareholders the most. As such, many oil companies prefer to contain costs, avoid new rigs, and keep investors happy. This is a big reason why U.S. oil production in 2024 is expected to be lower.
Though it may not be common knowledge, small private oil producers have been the heavy hitters since the pandemic. With many working in the Permian Basin in West Texas and Southeast New Mexico, they accounted for a majority of 2023 oil production. These same small oil producers also provide a buffer when oil prices soar. They can ramp up oil production during these times to keep prices in check and then pull back in times of surplus. But this is not the case with larger public oil producers. They tend to change strategies over the long term instead of the short term. With 39 small oil producers acquired recently, it’s not surprising forecasts for U.S. oil production in 2024 has retracted. This is why U.S. oil production growth will likely be much less in coming months.
A Possible Silver Lining
Based on the above, it would seem the projections for U.S. oil production in 2024 is gloom and doom. With a likely decline in U.S. oil production growth, oil prices will climb assuming demand will stay the same. On the one hand, a boost in electric vehicle sales might help curb this demand. But based on current EV sales and trends, this doesn’t appear to be probable. U.S. consumer demand will persist according to experts, and this will require ongoing oil production growth. And without it, supply and demand supports higher barrel prices and prices at the pump. These trends are also likely to be affected by global events as well in the Middle East in coming months. Clearly, this doesn’t paint a favorable picture.
(The EV market is cooling–read all about it in this Bold story.)
But while many anticipate a decline in oil production in 2024, not all are on board. Some suggest that despite a smaller number of small oil producers, growth could rebound. The remaining small producers could choose to ramp up levels in coming months to offset this. This includes investing in new rigs and operating new shale sites. At the same time, drilling efficiencies may increase when existing rigs are asked to do more. This too could provide opportunities for better production and lower costs. And lastly, there’s always the chance large oil companies may shift gears should consumer demand require higher production levels. This is the least likely scenario, especially in the short term. But it’s one that could eventually occur in time.
