Oil prices have stagnated since OPEC decided to flood the international oil markets with high supply in an effort to retain market share. Unfortunately, many oil producers in the U.S. and other countries suffered under the weight of low prices that undermined profitability. Many employers had to lay off workers to account for the reduced operating margins they incurred as a result of the sudden decline in oil prices, and some companies even went bankrupt. The good news, however, is that many signs are beginning to appear that could indicate a gradual reversal in the fortunes of struggling domestic oil producers.
Traditional Oil Geopolitics
Oil has been extracted from the ground for hundreds of years using processes that have hardly changed over time. The general method of oil extraction involves drilling a well into the ground, then sucking the oil out using a pump. Although the exact technologies have changed over the years, the general methodology remains the same. Since the modern world runs on oil, nations in oil-rich areas, such as Saudi Arabia and Russia, have been able to exercise significant power in the international arena owing to their effective monopoly on oil production. When the technologies used for oil extraction change, it is natural that major oil producers will react in an effort to retain their political control.
Why Oil Prices Fell
Over the past decade, engineers have developed ways to extract oil using new technologies, such as hydraulic fracturing. The cost of drilling wells has also come down significantly as new technologies have decreased the risk of a new wellhead failing to produce. By the year 2014, the culmination of emerging technologies resulted in a situation that forced oil-producing nations to cut their margins to compete with the projected growth of new extraction technologies. In December 2014, OPEC agreed to slash oil prices by almost half in order to compete with emerging players that were able to extract oil at high efficiency from geographic locations where oil was relatively scarce.
Consequences of Oil Price Declines
The immediate result of OPEC slashing prices was a panic in domestic oil markets as producers struggled to account for the new reality. Over the next two years, the number of employees working in the oil production industry in Texas gradually fell from 306,000 to less than 200,000. Many oil producers were also forced to halt production at some of their existing wells and cancel plans for new ones.
Effect on Other Industries
Many technology companies that were depending on high demand for their innovative extraction technologies were put out of business when prices fell. Other industries that support the oil industry also suffered. For example, airlines saw demand for international fights decline in the wake of the oil price slump since international oil companies were sending fewer of their employees abroad.
After the initial shakeout, domestic oil producers have adapted with new future plans and improved technologies. Domestic oil production from the Permian in West Texas has achieved cost parity with traditional extraction methodologies used in oil-rich nations, such as Saudi Arabia. Consequently, domestic oil producers are starting to hire again as they once again find themselves in a position to compete in the international marketplace. In May 2017, for example, oil producers in Texas increased their payrolls by over 3 percent; this was the first increase in over two years.
The Years Ahead
Domestic oil production and its support industries will continue to grow in the years ahead. The technologies cutting the cost of domestic extraction continue to evolve at a rapid pace, and this trend shows no sign of declining in the years ahead. Further advances in extraction technologies will lead to many domestic extraction jobs returning while demand for international flights will also increase. The future of the domestic oil industry looks bright in the years ahead.
Talos Energy is a domestic oil producer that focuses on oil extraction in Texas and the surrounding areas. The company focuses on offshore oil exploration and production in the Gulf of Mexico and near the Gulf Coast. Talos Energy competes in the oil and gas segments of the energy markets. With over 33,000 square miles of proprietary extraction data designed to decrease the risk associated with drilling new wells, the company maintains a sustainable competitive advantage over other domestic oil producers. Talos Energy also engages in a wide range of joint ventures related to its core industry.
More information on Talos Energy can be found on their Facebook page.