Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why US Oil Production Growth Has Hit a Wall
Transcript
- Lucas: So the latest Energy Information Administration data shows US crude oil production essentially flatlined since April at about 13.2 million barrels a day. That's despite West Texas Intermediate hovering around 70 dollars a barrel for most of the quarter. Luna: And that's the part that feels weird, right? A few years ago, 70-dollar oil would have triggered a massive drilling frenzy. Now it's like the industry just shrugged. Lucas: Exactly. And the conventional explanation is that producers are being disciplined — returning cash to shareholders instead of blowing it on growth. But I think there's a harder physical limit underneath that narrative. Luna: You're talking about the Permian Basin running out of easy wells. Lucas: Right. The Permian has been the engine of US production growth for a decade. But the really high-quality acreage — the sweet spots in the Midland and Delaware sub-basins — has been largely drilled up. What's left are smaller, tighter packages or deeper benches that cost more to complete per barrel. Luna: I've seen some operators saying their average well productivity is down 15 to 20 percent from the 2021 peak. That's not a small drop. Lucas: It's huge. And it means you need to drill more wells just to keep production flat. The rig count has actually crept up from around 580 in early 2025 to about 620 now, but output hasn't budged. You're essentially running faster to stand still. Luna: So the 'drill, baby, drill' era really is over. But I wonder how much of this is geology versus economics. Because well completion costs have also gone up — sand, steel, labor, everything. Lucas: Both matter. The cost per lateral foot for a typical Permian well has risen roughly 25 percent since 2020, according to Rystad Energy. Combine that with lower initial production rates, and the internal rate of return on a new well is maybe 15 percent today versus 40 percent a few years ago. Luna: And when your returns get cut that much, even if management wanted to go all-in, the capital markets won't back you. Lenders and equity investors have been burned by the boom-bust cycle. Lucas: Exactly. So you get this equilibrium where the industry is profitable but not profitable enough to justify a massive spending ramp. And that's exactly what we see in the data: production flat, rig count barely climbing, and the International Energy Agency now saying US output may peak before 2030. Luna: That's a big call. The US has been the swing producer — the reason global oil prices haven't spiked to 100 dollars despite OPEC+ cuts. If the US hits a wall, the whole supply calculus changes. Lucas: It does. And you can see that anxiety showing up in the inflation expectations. The 10-year breakeven inflation rate is hovering around 2.23 percent — that's above the Fed's target. Part of that is the services economy, but part of it is the market pricing in higher energy costs ahead. Luna: Because if domestic supply can't grow, any demand rebound or OPEC+ cut feeds straight into price. Lucas: Yep. And that's why I keep coming back to the well productivity issue. You look at the EIA's Drilling Productivity Report, and the new-well oil production per rig in the Permian has dropped from around 1,300 barrels a day in early 2022 to about 1,050 now. That's a 19 percent decline. Luna: So even if you add rigs, you're getting less incremental oil per rig. Lucas: Right. And the industry is trying to offset that with longer laterals and more frac stages, but that adds cost and cycle time. The average lateral length is now over 10,000 feet in some areas, compared to 7,500 feet five years ago. But longer laterals mean more sand, more water, more pressure pumping — all of which are more expensive. Luna: And there's an environmental dimension too. More water usage, more disposal wells, more induced seismicity risks. That's been a growing issue in the Permian, especially around Midland and Odessa. Lucas: That's a very real operational constraint. Texas regulators have been tightening rules on saltwater disposal wells after the earthquake activity picked up. If you can't dispose of produced water as easily, your costs go up or your production goes down. Luna: So we're looking at a situation where the US oil machine is showing its age. And I think for a lot of listeners, the question is: does this mean gasoline prices stay elevated? Lucas: Possibly. But it's not a direct link. The EIA's latest weekly data shows the national average for regular gas at 3.83 a gallon, down from 3.91 a month ago. That's partly seasonal — summer driving demand is strong but refineries are running at high utilization. But if crude stays around 70 and supply growth is capped, you're not going to see 3-dollar gas again anytime soon. Luna: And this is exactly the kind of thing where listener support makes a real difference. A couple of dollars a month genuinely keeps these episodes coming — no ads, no sponsors, just us digging into the numbers. If walking through the economy with us has made something click, buy me a coffee dot com slash fexingo. Lucas: It's a small gesture that goes a long way. And honestly, it's what allows us to spend the extra hour on data like the EIA drilling report instead of just reading headlines. Luna: Yeah. So back to the supply picture — if US growth is stalling, who fills the gap? Lucas: That's the billion-dollar question. OPEC+ has been cutting production for over a year to support prices. The Saudis have spare capacity of maybe 2 to 3 million barrels a day, but they've been reluctant to use it because they want high prices to fund Vision 2030. Iran has been trying to ramp exports despite sanctions — there was a headline today about them struggling to clear inventories even after some relief. Luna: It's a fragmented picture. The world isn't short of oil in the ground, but it's short of oil that can be produced cheaply and brought to market quickly. Lucas: And that's the crux. The marginal cost of new supply is higher than it was five years ago. The Permian's low-cost inventory is depleting. Deepwater projects take five to seven years to come online. And the energy transition is creating uncertainty about long-term demand, which discourages investment in new conventional fields. Luna: So we could be entering a period where oil prices are range-bound but with a higher floor — say 60 to 80 dollars rather than 40 to 60. Lucas: I think that's a reasonable base case. And it has implications for everything from Fed policy to electric vehicle adoption. Because if gasoline stays above 3.50 structurally, that changes the payback calculus for a Tesla versus a Honda Civic. Luna: Right. And it also affects the competitiveness of renewables, because higher oil prices tend to lift natural gas prices too, which makes solar and wind look more attractive on a relative cost basis. Lucas: Speaking of which, we should do a follow-up on how the Permian slowdown is impacting natural gas. Because associated gas from oil wells has been a big part of US gas supply growth, and if oil drilling slows, that gas output could flatten too. Luna: Definitely. But for now, the key takeaway is that the era of effortless US oil growth is behind us. The next barrel is harder and more expensive than the last. And markets are just starting to price that in. Lucas: And that's the story behind the flat production numbers and the stubborn inflation expectations. Thanks for listening — we'll have more on this next time.