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Is the US Producing Too Much Oil?


OPEC’s production cut had many investors excited for a recovery in oil prices, but the U.S. seems determined to fill in that supply gap.

In this clip from Industry Focus: Energy, Fool energy analysts Sean O’Reilly and Taylor Muckerman discuss how much production is set to increase in 2017, what it means for the oil industry in the next few years, and why so many U.S. companies are making a less-than-opportune decision.

A full transcript follows the video.

*Stock Advisor returns as of March 6, 2017

This podcast was recorded on March 23, 2017.

Sean O’Reilly: Couple months ago, OPEC cut production, and everybody was like, “Oh, it’s $50, it’s coming back, maybe $70 this year.” You, very wisely, have been a little less euphoric, enthusiastic.

Taylor Muckerman: Yeah. I feel like we’ve talked about what’s happening months ago, before it actually happened.

O’Reilly: But we have to do it again.

Muckerman: Yeah. OPEC cut, U.S. said, “We’re not going to, we’re going to ramp it up.”

O’Reilly: Fuel Fix — you sent me a very interesting blog, I was very happy to read this, because it gives some hard numbers for what we’re talking about. The headline reads, “Is The Boom Back? Drillers to Spend $25 Billion More in 2017,” by David Hunn, it ran on March 16th. That’s a lot of money. And also, when I read this, it popped into my mind that Exxon[Mobil] (NYSE:XOM) made that $6.5 billion purchase from the Bass family down there in Texas, of shale property. So now, you have the biggest domestic energy company out there getting in on the game. It’s like, “Ugh, we’re going to do this again?”

Muckerman: Reminds me of their XTO purchase way back when.

O’Reilly: Oh, gosh, what year would that have been?

Muckerman: That was 2010 or 2011.

O’Reilly: How big was it? Why did you say that reminded you of this?

Muckerman: Because they were trying to get into the shale gas game when prices were sky high, then they fell off. At least now, maybe they’re buying at low prices. Could be. Maybe $50 is the new $100. The U.S., like you said, spending is up globally throughout the rest of this year, predominantly in the U.S.

O’Reilly: They’re getting so efficient. Yeah, so, what else did you take from this? What did U.S. production peak out at? 10.3 million barrels?

Muckerman: Something like that, we dropped below 9 [million] recently. But now, they’re expected to boost another 1 million barrels a day over the next year or two.

O’Reilly: Guys, stop it. Guys.

Muckerman: [laughs] Yeah. They keep getting more efficient.

O’Reilly: Crowe used to talk about how, “These guys only know one thing, these wildcatters, and that’s getting out there and finding some oil.”

Muckerman: Yeah. If you read the history of some of these guys, The Frackers is a book by Greg Zuckerman? I think?

O’Reilly: I can Amazon it.

Muckerman: I know his last name is Zuckerman, because it rhymes so nicely with my last name, Muckerman. Great book, yeah, the history of Harold Hamm and Aubrey McClendon and a few other infamous wildcatters.

O’Reilly: This is available on and fine bookstores everywhere. It is Gregory Zuckerman.

Muckerman: Gregory, good. My memory serves correctly.

O’Reilly: The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. Yee-haw.

Muckerman: That book goes back, I think, several decades, and nothing has changed. Oil has just gotten cheaper to produce via fracking. So, if you really want to learn about this, what’s going on in the United States, in my mind, that’s the book to read.

14 Comments on "Is the US Producing Too Much Oil?"

  1. dave thompson on Wed, 29th Mar 2017 10:23 pm 

    Fools are in the kings court.

  2. rockman on Wed, 29th Mar 2017 10:31 pm 

    “They keep getting more efficient.” Getting more efficient is getting more oil PER NEW WELL on average. That is not the same as producing MORE OIL. That is a function of how many new wells are drilled. And while the rig count has increased it is still far below the number of rigs drilling that led to production increase.

  3. Go Speed Racer on Wed, 29th Mar 2017 10:56 pm 

    O Wise and All Knowing Mr. Rockman ….

    I climb to your high mountain perch, to ask
    for wisdom, from your extensive knowledge …

    Seeing clearly the oil pricing goes up and
    down like a Yo-Yo due to high price causing
    overproduction, and low price causing
    underproduction, then shouldn’t the gubbamint
    stabilize the prices with programs?

    They did the same thing for farmers in ‘The New Deal’, so that farmers would plant stable
    quantities of food.

    Now, I realize the government no longer
    exists, it was bought out and dismantled
    by corporations. But imagine if it was the
    1970’s and we had a government, wouldn’t it
    make sense to control oil prices and production,
    using the clout of central planning?
    That way when they drill for oil, they know
    what they are going to get for pricing?

  4. deadlykillerbeaz on Thu, 30th Mar 2017 4:23 am 

    In a month to six weeks, the northern hemisphere is going to warm, the leaves on the trees will be there. The grass will grow, the bleak winter weather will be gone. The will shine.

    There will be millions of acres of land that will be planted for grains, beans, corn, and if all goes well, in the late summer, they’ll all be harvested.

    2,000,000 farmers growing commercial crops on 100,000,000 acres of land will need fuel oil.

    Since they can’t produce it, they have to buy the diesel for the tractors, trucks, combines and other equipment that may need fuel, a generator to have some electricity in the middle of nowhere.

    Where do they go to buy a couple thousand gallons of diesel? Well, an oil company would be a good place to go and ask.

    When they do, they’ll be buying 4,000,000,000 gallons of fuel, they’ll need some oil for the crankcase in the engine, don’t want to screech it all to a halt.

    Looks like 4,000,000,000/42 amounts to 95,000,000 barrels of oil, or more than 190,000,000 barrels of oil to be refined to satisfy the demand so agriculture can happen with those machines to do the planting and harvesting instead of some old nag pulling a plow.

    Without the farm machinery used in modern agriculture, it is a tough row to hoe.

    You are going to need oil, lots. The wheels fall off if you don’t get some oil.

    The demand never goes away.

  5. deadlykillerbeaz on Thu, 30th Mar 2017 4:35 am 

    The sun will shine. Thought the word, forgot to type it.

    I use large numbers to show the scale, the volumes needed. The actual numbers will be different in many ways, what numbers I use to demonstrate what is needed are not necessarily correct.

  6. twocats on Thu, 30th Mar 2017 7:48 am 

    It seems we have two distinct oil cycles – shale and large-scale. One is short cycle, the second long term. Can the current market structure properly sort out those two and ensure oil supplies from large scale projects get delivered, or will short cycles continually short-circuit the longer one?

  7. Cloud9 on Thu, 30th Mar 2017 7:57 am 

    Go, Venezuela has been centrally planning the price of food for their population for some time now. The end result of that social experiment resulted in bare shelves. Now their populace is starving. Economic systems are organic and by their very nature diverse. Hubris is the root of any assumption that such a diverse and interconnected system can be managed by central planners. While farmers were being paid not to plant, people in the cities were going hungry during the Great Depression. For all of Roosevelt’s efforts, he did not end the depression. The Japanese ended the depression when they brought us into WW II.

  8. rockman on Thu, 30th Mar 2017 8:48 am 

    Racer – I’m sure many won’t believe it but I’ve said it before: the oil patch would have welcomed govt price controls…justdon’t ask me what that price should be. Price volatility has always been destructive for the industry. Every economic analysis requires a price forecast typically out at least 10 years. Even underestimating the future price hurts: it kills prospects using a lower price forecast. And we just had a clear view of how overestimating future prices can bring about devastation.

    If companies knew TODAY oil will be $X/bbl for the next 20 years planning would be much easier: what worked at $X/bbl would get drilled and what didn’t wouldn’t. Just like the dynamics worked between WWII and 1970 when the Texas Rail Road Commission essentially set the global price if oil by controlling how much oil was produced from our wells. Texas was THE global oil producer and EXPORTER for most of that period. Texas was, in effect, “OPEC” and had one very powerful manager setting production volumes. Obviously this was the most stable period the oil patch experienced in its entire history.

    The US govt did try to influence the price of US oil production as well as the price of imported oil in the late 70’s/early 80’s. I’ll skip the details so research if interested. Bottom line: the effort, not surprisingly, was a complete failure that increased instability. For instance it was in the late 70’s the govt passed the ban on exporting oil produced in the US in the hopes of lowering domestic oil prices. But it was all rhetoric used in the effort to convince voters that the politicians were doing something to help the economy.

    The reality that the MSM didn’t bother to report: there was no effective ban. In fact, the year AFTER the ban law was passed the US exported more oil then during the year prior to the ban becoming law. Check the govt’s own numbers:

    More oil was exported in the 80’s after the ban law was passed. But not nearly as much was exported in the years immediately BEFORE President Obama rescinded the nonexistent ban law. Take that as a clue to how just incompetent (and dishonest) the US govt can be interfering in the market place.

  9. rockman on Thu, 30th Mar 2017 9:03 am 

    Twocats – “Can the current market structure properly sort out those two and ensure oil supplies from large scale projects get delivered”. Along those lines I point out a very critical misconception many are making: Big Oil, such as ExxonMobil, starting to commit big $bucks into the shales IS NOT GOOD NEWS with respect to the long term cycle you reference. Most of Little Oil went ape shit after the shales because that was all it was capable of doing: it couldn’t go Deep Water or international. That was the realm of Big Oil. And if there were enough potential in that realm for Big Oil it would be spending every penny it has there. But instead some of Big Oil is going after shales. But a big factor in those acquisitions is actually buying producing wells for a much lower price then those wells cost to drill. Folks need to contain their excitement over Big Oil buying out busted shale players until they actually see another drilling boom to begin.

  10. twocats on Thu, 30th Mar 2017 10:34 am 


    those are very good points. buying producing assets from defunct companies at bargain basement prices seems like a good/quick way to boost reserves and production from their end.

    Let’s assume (for a second, since I’m not sure if you believe this) that shale companies were drilling wells and hyping activity that did not have a good chance of being profitable. Do you see Big Oil being more sober in their assessments of well profitability, or are they just as eager to hype their book to raise equity & keep their credit score in good standing?


  11. Go Speed Racer on Thu, 30th Mar 2017 10:40 am 

    Probably the gubbamint could be constructive, if it provided a small amount of price support at the lowest prices, while taking tax revenue at the highest prices. That would round off the peaks and dips.
    The operators would prefer it because when they drill, the gubbamint would provide a guarantee of a minimum price to sell the oil at.

    I think it could be done, if we had a government. But we don’t, because it was purchased and dismantled by the rich corporations.

  12. BobInget on Thu, 30th Mar 2017 5:20 pm 

    Venezuela imploding.

  13. rockman on Thu, 30th Mar 2017 9:41 pm 

    twocats – “Let’s assume…that shale companies were drilling wells and hyping activity that did not have a good chance of being profitable.” No assumption required…that’s what happening today…to a degree. Why you see all the press releases pointing out “improved efficiencies” leading to higher initial flow rates. In my career I’ve drilled two “can’t miss prospects”… including one that redrilled a well that found a 150′ NG reservoir. And both prospects were dry holes. IOW there’s always a risk a well won’t produce as projected. And the shale game is a statistical play: companies hope that cumulative all its wells will be profitable while accepting some will lose money.

    But remember what’s the primary goal of a pubco: to add to its reserve base. Also understand that while a new well that will produce 200,000 bo that won’t recover 100% of its cost still adds to the primary goal: it adds 200,000 bbls of proved reserves to the companies books.

    In the shale game it isn’t always win/win (add reserves/make a profit). Sometimes its win/lose (add reserves/lose money). Every shale well completed by every company added proved reserves to the total…including every money loser. So when you see someone estimate a shale play will ultimately recover X billion bbls of oil the includes a number of bbls from money losing wells. Thanks a bit of the shine off those numbers, eh? LOL

    Perhaps that helps explain how companies deal with the risk factor…and drill a lot of wells. Also why you didn’t see private companies (like the Rockman’s) go ape shit over the shales: drill enough win/lose wells and the owner runs your sorry ass off. LOL.

  14. rockman on Thu, 30th Mar 2017 9:47 pm 

    racer – “…if it provided a small amount of price support at the lowest prices, while taking tax revenue at the highest prices.” That already happens to a degree. Understand that when a company “loses” a billion bbls of proved oil reserves from its books that loss show up in its tax computation. And when prices boom the various mechanisms the industry uses to reduce its tax burden become limited.

    But that just highlights the instability brought on by the oil price volatility.

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