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Oil prices crashed, but US output is still rising. How long can that last?

An oil drill is viewed near a construction site for homes and office buildings on February 5, 2015 in Midland, Texas.
An oil drill is viewed near a construction site for homes and office buildings on February 5, 2015 in Midland, Texas.
Spencer Platt/Getty Images

One of the biggest energy stories of the last decade has been the vast oil boom in the United States. But how long can it last?

When oil prices were soaring during the mid-2000s, energy companies found it highly profitable to use fracking, horizontal drilling, and other techniques to extract oil from shale formations in places like Texas and North Dakota. The result: a glut of oil and a major crash in global oil prices back in 2014.

What's surprising, though, is that US oil output has kept growing even though oil prices have fallen by half since last summer. On March 25, the US Energy Information Administration announced that US crude production rose yet again to 9.42 million barrels per day — the highest level since 1973:

(Energy Information Administration)

This is pretty astonishing. After all, it costs more to frack oil from shale rock in North Dakota than it does to pump out oil from conventional fields, like those in Saudi Arabia or Kuwait. So, when prices were dropping last year, many onlookers figured it would wipe out the US oil industry. (Some Saudi officials were reportedly hoping this would be the case.) Yet America's oil production has stayed remarkably resilient.

US drillers have felt the pinch from low prices — but they're also adapting

US oil drillers have certainly been affected by the recent crash. The price of West Texas Intermediate fell from $95 per barrel in July 2014 to less than $50 per barrel today. The result? It's less profitable for many companies to keep pumping for oil in difficult shale formations the way they used to.

To some extent, you see this in the data. The number of active drilling rigs has been declining steadily since the crash. On March 20, according to data from Baker Hughes, there were 825 active oil drilling rigs in the United States. That's plummeted from 1,473 rigs a year ago. Here's a chart from Business Insider:

(Chart: Business Insider, Data: Baker Hughes)

But that hasn't translated to a decrease in US oil production yet. Why is that? As the Energy Information Administration explains, when oil companies start idling their drilling rigs, they generally start with the older, least-efficient rigs first. That's then offset by output from the remaining rigs, which are in the most productive, oil-rich regions.

What's more, as Ed Crooks recently reported in the Financial Times, US oil companies are finding ways to pump oil more efficiently. They're putting pressure on suppliers to cut costs. They're adopting new techniques and technologies like "pad drilling," which allows them to drill multiple wells in tight clusters with fewer rigs. Add it all up, and oil output per rig has risen 29 percent in North Dakota's Bakken region and 30 percent in West Texas's Permian Basin.

But US oil production likely won't keep growing indefinitely — and is expected to taper off later this year

An oil pump-jack is viewed on March 26, 2015, in the oil town of Gonzales, Texas. (Spencer Platt/Getty Images)

That dynamic can't last forever, though. Most of the oil wells drilled in the shale regions of North Dakota and Texas tend to produce a lot of crude very early on and then start declining sharply within a few years. (Output from a typical well in the Bakken declines by 65 percent after the first year.)

So over time, oil producers will need to keep drilling new wells to maintain production. But it's costly to drill a new well, and low oil prices make this a less-attractive proposition at the margins. Companies like EOG Resources and Hess have already announced cuts to capital spending this year.

The EIA, for its part, recently noted that this crunch has already started to hit certain shale regions, albeit unevenly. Crude oil production in the Permian Basin in West Texas is expected to rise through April 2015. But production in other shale regions, like the Bakken in North Dakota or Eagle Ford in East Texas, is expected to decline slightly:

(Energy Information Administration)

Indeed, while the recent growth in oil production has been impressive, last week's gain was actually the smallest since January. And the International Energy Agency expects US oil production to plateau sometime in the middle of this year, at least if prices stay around $60 per barrel. (If, say, the ongoing conflict in Yemen causes a surge in global oil prices, that would presumably give a boost to US drillers.)

That said, there's a big difference between a plateau in oil production and a massive drop-off. Officials at OPEC, the massive oil cartel that includes Saudi Arabia, have been predicting a decline in US oil production this year. (They've also been hoping for a drop-off, since it would cause oil prices to rise and augment their budgets.)

So far, US oil producers have been defying expectations. Whether they can continue to do that will go a long way toward determining how oil prices unfold in the near future.

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