Frackin’ the Bakken
DENNIS LITHGOW is an oil man, but sees himself as a manufacturer. His
factory is a vast expanse of brushland in west Texas. His assembly line
is hundreds of brightly painted oil pumps spaced out like a city grid,
interspersed with identical clusters of tanks for storage and
separation. Through the windscreen of his truck he points out two
massive drilling rigs on the horizon and a third about to be erected.
Less than 90 days after they punch through the earth, oil will start to

What if they’re dry? “We don’t drill dry holes here,” says Mr
Lithgow, an executive for Pioneer Natural Resources, a Texan oil firm.
In the conventional oil business, the riskiest thing is finding the
stuff. The “tight oil” business, by contrast, is about deposits people
have known about for decades but previously could not extract

Pioneer’s ranch sits at the centre of the Permian Basin, a
prehistoric sea that, along with Eagle Ford in south Texas and North
Dakota’s Bakken, are the biggest sources of tight oil, a broad category
for the dense rocks, such as shale, that usually sit beneath the
reservoirs that contain conventional oil. Since 2008 tight-oil
production in America has soared from 600,000 to 3.5m barrels per day
(see chart 1). Thanks to tight oil and natural gas from shale, fossil
fuels are contributing ever more to economic growth: 0.3 points last
year alone, according to J.P. Morgan, and 0.1 to 0.2 a year to the end
of 2020, according to the Peterson Institute, a think-tank. Upscale
furniture stores and luxury-car dealerships have sprung up in Midland
since the boom began. Mr Lithgow has truck drivers who earn $80,000 a
year. Local oil-service firms have been known to hire fast-food workers
on the spot. In all, the unconventional-energy boom will create up to
1.7m new jobs by 2020, predicts McKinsey, a consultancy.

And that is only part of the story. Another benefit of tight oil is
that it is much more responsive to world prices. Some economists think
this could turn America into a swing producer, helping to moderate the
booms and busts of the global market.

Pioneer is rapidly boosting production. But Scott Sheffield, the
company’s boss, worries that in a few years he will run out of
customers; America has prohibited the export of crude oil since the
1970s. At $100 a barrel, the price of West Texas Intermediate (the most
popular benchmark for American oil) is comfortably above the break-even
cost of tight oil. But the prospect of a glut has futures pricing it at
$20 less in 2018. “There will be a lot less oil-drilling when you take
$20 out of everybody’s margin,” says Mr Sheffield.

Until the early 1970s, America was the world’s largest oil producer
and the Texas Railroad Commission stabilised world prices by dictating
how much the state’s producers could pump. When Arab states slapped an
oil embargo on Israel’s Western allies after the six-day war in 1967,
Texas cushioned the blow by allowing a massive production boost.

But rising consumption and declining production eroded the state’s
spare capacity, and in March 1972 Texas called for flat-out production.
“This is a damn historic occasion and a sad occasion,” the Texas
Railroad Commission’s chairman declared. When Arab producers imposed
another embargo the next year, prices rocketed. America had lost the
role of world price arbiter to OPEC, a cartel dominated by despotic
regimes. American politicians tried desperately to curb consumption (for
example, by lowering speed limits) and to conserve supplies (by banning
crude-oil exports in 1975).

American production declined steadily from a peak of 9.6m barrels a
day in 1970 to under 5m in 2008. About then, independent producers began
adapting the new technologies of hydraulic fracturing (“fracking”) and
horizontal drilling, first used to tap shale gas, to oil. Total American
production has since risen to 7.4m barrels a day, and the Energy
Information Administration, a federal monitor, reckons it will return to
its 1970 record by 2019. The International Energy Agency is more
bullish; it reckons that by 2020 America will have displaced Saudi
Arabia as the world’s biggest producer, pumping 11.6m barrels a day.

Besides directly creating new jobs and income, the fossil-fuels boom
could help growth by reducing America’s vulnerability to oil-price
swings, in two ways. First, as production rises and imports shrink, more
of the cash that leaves consumers’ pockets when the oil price rises
will return to American rather than foreign producers. David Woo of Bank
of America/Merrill Lynch notes that America’s petroleum deficit has
narrowed to 1.7% of GDP while Europe’s has widened to nearly 4%, which
seems to have made both the dollar and the economy less sensitive to oil

The second channel lies in the economics of shale. Oil flows
relatively easily through the porous rocks that make up a conventional
reservoir, so a conventional well can tap a large area. As a result, the
volume of oil pumped each day declines slowly, on average at 6% per
year. By contrast, oil flows much more sluggishly through impermeable
tight rock. A well will tap a much smaller area and production declines
quite rapidly, typically by 30% a year for the first few years (see
chart 2). Maintaining a field’s production levels means constant
drilling. The International Energy Agency reckons maintaining production
at 1m barrels per day in the Bakken requires 2,500 new wells a year; a
large conventional field in southern Iraq needs just 60.

This all means that when oil prices rise, producers can quickly drill
more holes and ramp up supply. When prices fall, they simply stop
drilling, and production soon declines. In early 2009, after prices
collapsed with the global financial crisis, Pioneer shut down all its
drilling in the Permian Basin. Within six months, output in the affected
areas dropped by 13%.

Bob McNally of Rapidan Group, an industry consultant, predicts that
America could be “force-marched” back to the stabilising role it played
in the 1960s, this time responding to the market’s invisible hand rather
than government diktat. Will that work in practice? It may already have
done so. Since 2008, the Peterson Institute notes, turmoil in Sudan,
sanctions on Iran and declining North Sea output have taken a lot of oil
off the market. Without America, which accounted for half of the growth
in global output over that period, Persian Gulf producers might not
have been able to make up for the loss. Prices could have risen sharply,
hurting consumers everywhere. Yet they did not.

Oil firms try not to over-react to short-term price fluctuations, of
course. Capital, equipment and labour all cost money, so they try to
ramp up production only in response to what they think will be long-term
shifts in the oil price.

Frackin’ the Bakken
The ban on crude-oil exports hurts producers and makes it harder for
America to become a swing supplier. Light, sweet (ie, low-sulphur) West
Texas Intermediate already trades at a discount of $8 to Brent, its
global peer. That is due mostly to transport and storage bottlenecks in
America, but increasingly the export ban makes a difference. In recent
decades American refiners have reconfigured themselves to handle the
heavier, sour oil imported from Mexico, Venezuela and Canada’s tar
sands, leaving them with less capacity for refining tight oil, which is
light and sweet.

The oil price at which shale producers break even ranges from $60 in
the Bakken to $80 in Eagle Ford, reckons Michael Cohen of Barclays, a
bank. If exports yielded an extra $1 to $1.30 a barrel, he estimates
that might raise total output by as much as 200,000 barrels per day.

If the ban were lifted, crude-oil exports could start more or less
straight away. The necessary pipes and tankers are mostly there already.
But the political debate is only in its infancy. By law the president
can allow exports he considers in the national interest. Barack Obama
has yet to express a view on the ban. Legislators from non-oil-producing
states are wary. “For me the litmus test is how middle-class families
will be affected,” says Ron Wyden, the Democratic chairman of the Senate
energy and natural resources committee.

The main beneficiaries of the ban are the refiners. They buy light,
sweet American crude for less than the global price, turn it into petrol
and then sell that at the global price. Exports of refined petroleum
products are not banned, and have, unsurprisingly, soared.

Defenders of the ban (including, naturally, some refiners) claim that
if America exported more oil, Saudi Arabia would reduce its own output.
Prices to American consumers would not fall, they say, and might even
rise. Historical evidence says otherwise, however. When Congress allowed
Alaska to export crude oil in 1995, its west-coast customers did not
pay any more for petrol, diesel or jet fuel.

Oil producers would obviously benefit from lifting the ban. So might
other Americans, in less obvious ways. A global oil market that fully
included America would be more stable, more diversified and less
dependent on OPEC or Russia. The geopolitical dividends could be hefty.
As Pioneer’s Mr Sheffield notes, “It’s hard to believe we’re asking the
Japanese to stop taking Iranian crude, but we won’t ship them any crude

Correction: We said above that higher export
prices could raise output by as much as 200,000 barrels per year. We
meant per day. Sorry. This has been corrected.