Whisper it. Oil production in the US is increasing. The country where output peaked in 1970 and then shrank by 40 per cent over four decades, has turned some kind of corner. Between 2008 and 2010, production rebounded by 800,000 barrels per day to 7.5 million barrels per day, and analysts forecast more growth to come. Goldman Sachs predicts that by 2017 production in the US could reach almost 11 mb/d, just shy of its all-time high, restoring the country to its former glory as the world’s biggest producer.

One reason is a sharp increase in production of “shale oil”. In North Dakota,Texas and Oklahoma, companies are using hydraulic fracturing, or “fracking” – a controversial technique that has revolutionised US natural gas production – to extract a range of liquid hydrocarbons from non-porous shale that used to be thought unworkable.

Daniel Yergin, chairman of the US-based energy consultancy IHS CERA, argued recently in The New York Times that breakthroughs like shale oil are inevitable as oil prices rise: “Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.” He goes as far as to suggest that “peak oil” – the moment when global oil production starts to decline because of geological limits – can be deferred almost indefinitely. Yet supply of oil is only part of the equation and recent economic analyses suggest a very different outlook.

Indeed, if the world is suddenly awash with oil, somebody forgot to tell the oil market. Oil remains stubbornly above $100 per barrel of Brent crude, the main international benchmark. Most analysts agree this is because supply is struggling to keep pace with demand, despite weakening western economies. But if all this extra oil is coming on-stream, how come?

Part of the reason is down to short-term unforeseen disruptions, such as the Deepwater Horizon disaster in theGulf of Mexico last year which delayed many drilling projects, and the Libyan revolution which cut global supply by almost 1.6 mb/d. The impact of these events should fade in time but there are clearly deeper forces at work. Producing oil is getting harder.

Not that it was ever easy. The amount of oil produced by existing fields is always in decline because as oil is extracted, pressure in the reservoir falls and the oil comes out more slowly. As a result, every year the industry must drill new wells capable of supplying around 3 mb/d – or 30 per cent of Saudi Arabia’s production – just to stand still. Satisfying the growth in global demand, at least when the economy is expanding, requires roughly another 1.5 mb/d annually. 

Filling these holes gets more difficult as the “easy oil” gets scarcer. Companies are now exploring to the ends of the earth – from the Falklands to the Arctic– and are drilling reservoirs that are deeper, hotter and higher pressure than ever, all of which raise new engineering challenges. That has pushed costs up massively, with effects that have yet to be widely understood.

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