US Onshore Lower 48 States Oil Production

Source: EIA

US onshore supply from the Lower 48 states has declined at an entirely predictable pace since production peaked in 1970. For example, the trend line from the mid-1970s would have predicted production in, say, 1995 within 100,000 barrels per day (+/- 2%), regardless of oil prices, global supply or demand, or technology development. That's a remarkably consistent and tight fit.

There are, however, two exceptions to this historical pattern. During the Second Oil Shock--after 1979, when OPEC maintained a high price policy--US supply leveled. While high oil prices did not increase US conventional production, it prevented supply from falling.

This same pattern is visible after 2004, when oil prices rose to their recent levels. Just as before, US onshore conventional production leveled, but did not fall as anticipated by the trend line.

How much does this matter? In 1985, OPEC abandoned its high price policy and oil prices collapsed. The following year, US oil production fell nearly 700 kbpd in just ten months. Today, US Lower 48 conventional, onshore production stands at 3 mbpd. If production returned to trend, as it did in 1986, it would fall to 2 mbpd, a drop of one million barrels per day from current levels.

High prices have supported production not only in the US. About 26 mbpd of conventional, non-OPEC production is exposed to the same pressures as in the US. Thus, if the US precedence holds internationally, some 8 mbpd of conventional production could be at risk from falling oil prices. That would be a volume greater than the entire increase in unconventional production since the recession.

Now, the fall in oil prices has been less than it was in 1985, and therefore the effect on production is likely to be less severe. But it could be material--4 mbpd of lost production would not be particularly surprising.

Can shales compensate? Can they cover both increased global demand and faltering conventional supply? It may be harder than is commonly assumed.