AQUA BOOK 2016 - Page 5

SHALE OIL CYCLE T he oil cycle between 2009 and 2014 was a classic economic textbook case about the rise and fall of a competitive industry. After oil prices rebounded to over $80 per barrel by late 2010 from below $40 during the depths of the global recession a year earlier, oil production in Texas rose explosively. World oil prices escalated in 2009 due in part to strong demand from emerging markets, notably China. Other than high oil prices, advances in drilling technologies called fracking spurred oil exploration and drilling activities in the Eagle Ford and Permian Basin formations in Texas. By late-2012, the U.S. had surpassed Saudi Arabia as the world’s largest crude oil producer. Eagle Ford Production (thousand barrels/day, right scale) 7,500 $100 West Texas Intermediate ($/barrel, left scale) 5,500 $50 3,500 $0 1,500 2009 2010 2011 2012 2013 2014 2015 Source: Energy Information Administration. SHALE OIL CYCLE Crude Oil Price & Production Oil prices are determined by market supply and demand conditions. . . SUPPLY AND DEMAND Oil prices are determined by market supply and demand conditions around the world. Without corresponding reductions in oil production in other parts of the world, oil prices must fall in response to the U.S. supply glut flooding the world markets. As Saudi Arabia and other OPEC members strived to keep their own market shares rather than holding up oil prices, excess supply of crude oil around the world led to nothing but further declines in market prices after mid-2014. The oil markets entered year 2015 with prices returning to the early-2009 levels around $50 a barrel. Concerns about an economic slowdown in China exacerbated the oil price collapses to levels well below what would be economically feasible for U.S. energy companies to drill new wells. Annual Review of South Texas Economy 3