Signs of the oil bust abound. The price of West Texas Intermediate crude has fallen in half in the past six months. The search for oil, which fueled a gold-rush mentality in North Dakota and Texas, is abating. According to Baker Hughes, there were 1,140 rigs drilling for oil in the U.S. on Feb. 6, down from a peak of 1,609 on Oct. 10, 2014. In Houston, the Wall Street Journal reports, oil companies are shedding jobs and vacating office space.
And yet a funny thing has happened during the bust. Oil production in America has been rising, as this chart of monthly oil production from the Energy Information Administration shows. In November, the U.S. produced 9.02 million barrels of oil per day, up 14.5 percent from November 2013. The last time the U.S. pumped more than 9 million barrels of oil per day for two straight months was in 1986. This week, in its short-term energy outlook, the Energy Information Administration noted that the boom is continuing. Production in January 2015 rose to 9.2 million barrels per day. And even with WTI crude settling at a forecasted price of about $55 per barrel for the year, production for all of 2015 should come in at 9.3 million barrels per day—up 7.8 percent from 8.63 million barrels per day in 2014.
U.S. Monthly Oil Production in 2014
Millions of barrels of oil per day
That’s not what usually happens when the price of a vital commodity goes bust. Typically, producers react to supply gluts and falling prices by shutting down production—the better to bring supply in alignment with demand and support prices. It doesn’t make much sense to pump oil when the market price is below the so-called breakeven—the point at which pumping is profitable. And in fact, the rest of the world is effectively putting the brakes on production. The EIA expects global production to grow from 92.94 million barrels per day in 2014 to 93.76 million barrels per day in 2015—an increase of 820,000 barrels, or just .9 percent. The U.S., which accounts for just 10 percent of global production, is expected to supply 670,000 new barrels—82 percent of the globe’s total growth.
What we’re seeing, I’d argue, is an example of yet another type of American business exceptionalism. Compared with many of their peers in other countries, U.S. firms have often—not always, but often—demonstrated a superior capacity to adapt rapidly to changing circumstances. We saw it after the dot-com bust, as new tech industries arose amid the wreckage. And we saw it in 2009 and 2010, when companies large and small acted swiftly, often brutally, to ensure their survival, return to profitability, and help the economy come back (ahem) better, stronger, and faster.
Look hard enough, and you can see it in the oil patch, too. In recent decades, the oil industry—especially in the U.S.—has evolved from a brute-force industry into a nimbler high-tech manufacturing one. Fracking—a new drilling technology developed primarily in the U.S.—propelled the shale revolution. And technology-based companies don’t respond to falling market prices by cutting production or shutting down. Rather, they innovate and experiment to bring down the cost of production and operations, push suppliers for lower prices, and hold down costs. If the market won’t keep the market price above the break-even price, you can stop producing—or you can try to lower the break-even price.
The oil industry is more than 150 years old. But fracking is a remarkably young and still immature industry. And refinements are continuously being made to the fracking efforts that ignited the boom. Oil firms now drill wells more closely together, saving on time and supplies. In December, Fortune’s Brian Dumaine described a “new technology called ‘super fracking’ in which drillers pump a lot more sand into their wells when they fracture the oil shale.” The result: “Productivity at some super-fracking wells has risen from 400 barrels a day to 600, lowering the break-even cost.”
Elsewhere, as Bloomberg’s David Wethe reported this week, companies are taking a second bite of the apple. “Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn’t exist when they were first drilled,” Wethe wrote. Big iron and big steam are meeting big data. “New wells can cost as much as $8 million, while re-fracking costs about $2 million,” Wethe noted, citing oil-services giant Halliburton.
Then there’s old-fashioned cost-cutting. During a boom, everything costs more—overtime for workers, like the welder profiled by the Wall Street Journal who earns $140,000 per year, equipment like rigs that are in high demand, workforce housing in North Dakota. When tight markets start to give way to excess capacity, American companies tend to be quite nimble at seeking better terms, renegotiating contracts, and generally taking advantage of the altered dynamic.
Finally, there is the discipline corporate America is best at: holding labor costs down. Halliburton this week announced it would slash 6,400 jobs. In late January, as the New York Times reported, oil giant BP froze wages for some 80,000 workers. Companies have become so serious about holding down costs, they’re doing the unthinkable: cutting the salaries of top executives. The Houston Chronicle reported in January that Anthony Petrello, the chief executive officer of driller Nabors Industries, who is famous for his high compensation, cut his own salary by 10 percent.
These efforts won’t make producing oil profitable regardless of the market price. Some wells will undoubtedly close, and many oil-related companies will certainly go bust. Many more oil workers will lose their jobs. But the efforts at continuous improvement combined with evasive action mean a lot more profitable activity can take place at these prices than previously thought. And as a result, the fallout will be limited. Compared with other global oil producing powers—Nigeria, Venezuela, Russia—the impact of lower prices will be much smaller in the U.S. Cheap oil will produce much less economic dislocation, much less disruption to federal revenue collections, and less political instability.
The oil bust is upon us. Long live the oil boom.