Offshore drilling and "tight oil" account for most of the recent increase in U.S. oil production.
Offshore drilling and “tight oil” account for most of the recent increase in U.S. oil production.

A report from the U.S. Energy Information Administration dated Feb. 21 showed that American crude oil production rose for the second month in a row in November 2016. This news would be relatively unremarkable if not for the fact that this streak has not been seen for almost two years.

The oil production data comes as domestic drillers, and the organizations that manage and finance them, seem to be experiencing a new wave of optimism. Recent shifts in global trading have sent crude oil prices somewhat higher, leading producers to respond to demand in kind. The EIA reported that very soon after the West Texas Intermediate index bottomed out around $30 per barrel in the first quarter of 2016, drilling in the Gulf of Mexico began to increase. This production ramp-up was well-timed, as WTI prices rebounded to within $45 per barrel by the end of Q2 2016. The feat is all the more remarkable considering these projects had to gain approval years in advance, some as early as 2012.

This surge of activity in the Gulf of Mexico coincided with a similar uptick in drilling in Alaska, according to EIA data. Along with steady production in the Lower 48, this combined effort allowed the U.S. to clock an estimated net increase of 105,000 barrels of crude per day in November 2016. Estimated daily production was 232,000 barrels above the previous month in October 2016 as well.

All told, the EIA estimated that the U.S. averaged 8.9 million barrels per day in 2016. While certainly an improvement, this figure still falls short of 2015 domestic production totals by almost a half million barrels per day. Put into perspective, however, U.S. oil production has been extremely dynamic. As EIA data show, 2015’s production totals were the second-highest on record. But in 2008, less than a decade earlier, domestic crude output was at its lowest point since 1949.

Tight oil and trade
Economists, executives and employees will each give their own answer to the question of whether such volatility is good or bad. Like any commodity, there exists a very complex relationship between oil production and its market price. A number of recent trends have worked in favor of American oil production on the whole, but usually at the expense of stability.

On the ground level, domestic production numbers have soared mostly thanks to so-called “tight oil.” This category of reserves includes light crude deposited in shale and sandstone formations deep underground. Newly developed drilling techniques like hydraulic fracturing allow engineers to harvest this oil that was once deemed too difficult and expensive. This technology is the source of the majority of U.S. oil production increases seen since 2010. According to EIA estimates, this trend will continue for at least another 10 years. By 2040, the EIA expects tight oil to comprise most of America’s crude output, supplemented by conventional sources.

However, as previously mentioned, oil production increases don’t usually occur in the absence of profit, and American producers are profiting for now thanks to a decision out of Saudi Arabia. After years of debate, the Saudi-led OPEC and most of its member nations finally agreed to reduce their total oil production for six months in an effort to stimulate the market price of oil.

The plan already shows signs of working. Bloomberg reported that as of January 2017, OPEC was within 90 percent of its lower production targets. However, much of this result was apparently due almost entirely to sacrifice on Saudi Arabia’s part. Out of 13 OPEC member nations, in addition to 11 non-members who also signed onto the deal, only four actually reduced oil production enough to meet targets. Since Saudi Arabia is responsible for the majority of the world’s oil output in the first place, this means the nation shouldered the responsibility almost entirely on its own.

The new normal?
Again, the strategy has seemingly worked in the very short term, but remains questionable over the next few years. Bloomberg noted that Brent crude prices did rise as soon as OPEC announced the start of the arrangement, hitting a reasonable $55.59 per barrel in mid-February. But the Brent index does not include North American product, which wholesale buyers have been flocking to in response. As the U.S. and Canada exploit tight oil reserves and record huge production increases, Saudi Arabia and OPEC will need to continue trying to coordinate sweeping price-fixing plans. Whether this strategy will actually work out in OPEC’s favor is up for debate.

There are even more variables at play in any case. Tight oil reserves in North America have already proven very unpredictable, and this has only made the market more competitive. Meanwhile, the entire world is slowly trying to move away from oil and toward other options like natural gas and renewable energy. Many expect this will only lead to an even higher degree of price fluctuation in the years to come.