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