US oil production set an all-time record in November, as the most recent data revisions indicate that oil production broke through the 10 million barrels per day mark for the first time since 1970. The US Energy Information Administration estimates that production in February was 10.3 million barrels per day, putting the US firmly in second place ahead of Saudi Arabia on the list of the world’s largest oil producers. Russia remains the number one oil producer, at over 11 million barrels.
US oil production hasn’t been this high since the early 1970s. After a multi-decade decline, oil production bottomed out during the financial crisis at under 4 million barrels per day. The increase in production has been brought about partly because of increases in oil prices, but also because of the shale oil production boom that those higher prices have brought about.
Oil prices remained well over $100 in 2014 before plummeting below $30 in 2016. That threatened to put a lot of oil producers out of business, especially shale oil producers, whose business is much more resource-intensive than traditional oil drilling. With OPEC having cut production and vowing to continue those cuts through 2018, the oil price subsequently rebounded, having more than doubled from its lows to get back to around $62 per barrel today. That has renewed the economic viability of shale oil and helped to stimulate production increases.
While US oil production is expected to continue to increase this year, there are a couple of issues that could put a wrinkle in that projection. The most recent is the introduction of tariffs on steel and aluminum, which could drive up the cost of oil production by 3 to 10 percent. Steel is particularly important in building the pipelines that transport all this oil production across the country. While President Trump has taken some steps to mitigate some of the tariffs’ harshest effects, marginal producers could still see themselves forced out of business.
The other factor is that shale producers have been largely dependent on cheap debt financing. Massive amounts of debt have been issued to finance production, but in many cases the return on investment just hasn’t been there, particularly when oil prices plummeted from 2014 to 2016. With interest rates likely to rise, the financing model of shale oil production may come crumbling down. That could be bad news both for shale oil producers and for their investors.