U.S. Oil Production Growth Unlikely to Meet Forecasts for 2023

Last week, I broke down some of the key findings for traders from the most recent Dallas Fed Energy Survey. This week, I’ll be looking into one of the most important issues for 2023: U.S. oil production growth.

With global demand expected to grow in 2023, especially as China ends its restrictive COVID policies, the central question facing markets is whether the oil supply will be able to meet demand.

The EIA forecasts that global oil production will increase by 1.1 million bpd in 2023. Whereas the EIA sees Russian oil production declining by 1.5 million bpd, oil production in other non-OPEC and OPEC countries is forecast to increase by 2.4 million bpd. The EIA sees the United States as the largest single source (40%) of non-OPEC production growth in 2023, with most of that production coming from the Permian region. This means the agency believes that U.S. oil production will grow by 960,000 bpd in 2023.

The IEA’s forecast is similar but not as high. It predicts that global oil production will grow by 1 million bpd, with Russian oil production declining by 870,000 bpd and production elsewhere by 1.9 million bpd. The IEA also believes that U.S. production will supply the largest portion of this growth, but it doesn’t specify how much.

The question for traders is whether U.S. production is prepared to grow by almost 1 million bpd. In order to assess this, it is important to examine the following components: assets, capital, cost of and access to materials and labor, regulations, and oil price.

Assets

Geologically, the Permian and other shale oil fields have sufficient oil reserves to grow production by much more than 1 million bpd. However, seems as though there are fewer easy-to-drill assets than there were previously. For example, in the recent Dallas Fed Energy Survey, a maturing asset base was listed by oil executives as the second most important reason why production isn’t growing at a faster rate.

Capital

Access to capital to increase drilling is a significant issue facing U.S. oil companies and is one of the primary hindrances to growth. However, it does seem as though the industry has access to sufficient capital to continue growing production, albeit at a slower rate of growth than was observed in 2022. Still, companies experienced unforeseen cost growth in 2022 and are thus increasing capital expenditures to account for cost increases rather than expanding drilling activity in significant ways.

Materials and Labor

Difficulty obtaining the materials necessary for oil drilling (e.g., tubular steel products) and difficulty retaining labor have also hindered U.S. oil production growth. According to the Dallas Fed Energy Survey, access to materials and labor and the rising cost of materials and labor continue to impact drilling, although the rate of cost increases is starting to slow.

However, one executive commented that even if the government removed all of its regulations facing oil production, U.S. production would only increase by 10% because there aren’t enough people to fill the necessary jobs. It is likely that these factors will continue to hinder production growth in 2023.

Government Regulations

Complying with government regulations remains an important reason why drillers aren’t expanding as fast as they otherwise could, but it is no longer the most important factor. It is true that if the government expedited permits for needed energy infrastructure, firms would feel more comfortable expanding drilling. When government regulations are applied stringently, or government regulations are in a state of flux, firms are less likely to drill beyond what they absolutely need. Many firms feel that government regulations are still a significant hindrance to producing abundant, low-cost energy in the United States. However, it does not seem that these regulations are more onerous in 2023 than they were in 2022.

Oil Prices

Price volatility impacts drillers’ willingness to drill because when oil prices are highly volatile (as they are now), a producer has no idea how much revenue his barrels will bring in. Therefore, producers cannot plan for the future. In addition, price volatility also impacts producers’ access to capital. Financial firms are less likely to invest in oil drilling when oil prices are more volatile as opposed to when they are relatively stable.

Conclusion

All of these factors indicate that U.S. oil production will continue to grow but at a slower rate in 2023 than it grew in 2022. In 2022, U.S. oil production grew at a rate of about 600,000—700,000 bpd. If growth is slowing, it seems unlikely that production will grow by the 960,000 bpd the EIA forecasts for 2023.

However, if we see higher prices for an extended period, it might incentivize enough production growth to come close to the EIA’s forecast for production growth.

Disclaimer: The author does not own any of the securities mentioned in this article.