fedgazette Roundup (2011-2015)

Global factors influence Bakken oil boom

Rob Grunewald | Economist
Dulguun Batbold | Research Analyst

Published September 16, 2014

Rapid energy development in the Bakken and Three Forks shale formations, also called tight oil formations, in North Dakota and Montana has led to production levels of over 1 million barrels of oil per day. The Bakken and other tight oil formations in the United States have contributed to overall gains in oil production domestically and worldwide. While tight oil production in the Ninth District has been spurred by advances in drilling and production technology, it also has been influenced by a number of global factors, as described in James Hamilton’s recent paper, “The Changing Face of World Oil Markets.”

Global demand for oil has increased over the past decade. However, global demand has not been fueled by developed countries, but rather by developing countries. From 2005 to 2013, oil consumption in the United States, Canada, Europe and Japan fell at an average of 700,000 barrels per day every year. Meanwhile, oil consumption has grown rapidly in developing countries, which now account for 55 percent of global oil consumption. China alone contributed 57 percent of the global increase in oil consumption since 2005.

On the supply side, Hamilton points out that between 2005 and 2013, oil production did not keep pace with pre-2005 trends. One factor was geopolitical disturbances, such as the overthrow of Muammar Gaddafi in Libya and subsequent sharp drop in oil exports. In addition, conflicts in Syria and Sudan, sanctions in Iran and attacks on Nigeria’s oil infrastructure have suppressed oil production.

A second factor contributing to stagnant oil production is geological limitations. While oil production in the Middle East increased modestly since 2005, the number of active drilling rigs increased at a faster pace. Meanwhile, oil production among major international energy companies decreased somewhat since 2005, despite tripling capital expenditures. Both observations indicate that the difficulty and cost of producing oil have generally increased.

With global demand increasing and growth in supply constrained, oil prices have remained near $100 per barrel since 2011. In response to new technology, but also relatively high oil prices, drilling in tight oil formations like the Bakken has contributed to a 2.9 million barrels per day increase in U.S. production since 2005. The growth in tight oil extraction more than offset the 0.6 million barrels per day drop among conventional wells in the lower 48 states, Alaska and offshore production, and has reversed the declining trend in U.S. oil production (see Charts 1 and 2). The net gain in U.S. production since 2005 equals the net increase in oil production worldwide.

Bakken tight oil -- 9-16-14