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 US oil production growth has basically hit a wall. And I don't mean that as a temporary blip — I mean the structural run of rapid expansion that defined the last decade and a half is over. Luna: That's a big claim. We're still pumping over thirteen million barrels a day. Are you saying we can't grow from here? Lucas: Not exactly can't, but the trajectory has clearly flattened. Look at the data: from 2010 to 2019, US production grew by about nine million barrels a day — an unprecedented surge. Since then, it's been basically flat, hovering around 13.2 million. Even with WTI bouncing between seventy and eighty dollars, the rig count has been falling. We're at roughly 580 rigs now, down from nearly 800 in 2022. Luna: So higher prices aren't bringing more supply online. That's kind of the opposite of what basic economics would predict. Lucas: Right, and that's the key structural change. The shale revolution was driven by small, private operators who would drill like crazy whenever prices rose. But those operators consolidated into larger public companies, and the public companies are under enormous pressure from investors to return cash, not blow it on drilling. Shareholder discipline is real. Luna: But even the majors — Exxon, Chevron, ConocoPhillips — they're not ramping up either. I saw Exxon's latest guidance, and their Permian growth is like two to three percent annual, not double digits. Lucas: Exactly. And that's partly because the best wells in the Permian have already been drilled. The core of the Delaware and Midland basins are getting picked over. New wells have lower initial production rates and higher decline rates. So to just maintain flat output, you need to drill more and more wells. That's expensive. Luna: So it's a combination of geology and finance. The easy oil is gone, and Wall Street won't fund the chase. Lucas: Bingo. And that has huge implications for global oil markets. The US was the swing producer that kept OPEC+ in check. Now, if US production is stuck, OPEC+ has more pricing power. But they also face their own constraints — spare capacity isn't as high as advertised. Luna: And for the energy transition — if oil stays higher for longer, does that accelerate renewables adoption or just make it harder for consumers? Lucas: Both, honestly. Higher oil prices make electric vehicles and solar more competitive on a total-cost basis. But they also hurt consumer spending and keep inflation sticky. The trade-off is real. Luna: Let's zoom in on one specific number: the US rig count. You said it's down to about 580. How much of that is natural gas versus oil rigs? Lucas: Good question. According to Baker Hughes, oil-directed rigs are around 480, gas rigs about 100. So oil rigs have fallen by roughly a third from the 2022 peak. And the productivity per rig is also declining. The EIA's Drilling Productivity Report shows that new-well oil production per rig in the Permian has dropped by about fifteen percent over the past two years. Luna: So you're drilling fewer wells, and each new well is less productive. That's a double whammy. Lucas: Exactly. And yet, total US production hasn't fallen much because the existing wells, especially the DUCs — drilled but uncompleted wells — are being finished. But that inventory is largely drawn down. DUCs in the Permian are at the lowest level since 2014. Luna: So we're running out of the easy completions too. That suggests production could actually start declining in the next year or so. Lucas: That's what some analysts are projecting. The EIA's latest Short-Term Energy Outlook has US production averaging about 13.3 million barrels a day in 2026, basically flat. But some private forecasts show a decline by early 2027 if rig counts don't pick up. Luna: And what would it take for rig counts to pick up? Oil prices at eighty-five? Ninety? Lucas: Even then, you'd need confidence that prices will stay there. E&P companies have been burned by volatility. They'd rather return cash to shareholders than bet on a sustained price rally. Plus, service costs are up — rig rates, labor, steel. The breakeven price for a new Permian well has risen from maybe forty dollars a barrel in 2020 to over fifty-five now. Luna: So the economics are less attractive even at current prices. That's a big shift from the shale heyday. Lucas: Huge. And it means OPEC+ has a stronger hand. Saudi Arabia and Russia know the US can't just flood the market like it used to. That's why we've seen OPEC+ maintain relatively high prices even as global demand growth slows. Luna: Speaking of which, what about demand? Are we seeing any signs of demand destruction at these levels? Lucas: Yes, particularly in emerging markets. But in the US, gasoline demand has been fairly resilient, partly because the economy has been strong and EVs still only make up about eight percent of new car sales. However, the CPI data shows gasoline prices down a bit from last year — regular is around three eighty-three a gallon now, versus three ninety-one a month ago. Luna: So the consumer is getting a slight break, but not much. And with core CPI still running above three percent, energy is still a factor in inflation. Lucas: Right. And that brings us back to the structural supply constraint. If US production can't grow, any uptick in demand will push prices higher more quickly. That's a different world from 2015-2019, where the US could always ramp up and cap prices. Luna: It also changes the investment narrative. Energy stocks like Exxon and Chevron have been trading more like utilities — steady cash flows, dividends, buybacks. But if production is flat, how do they grow earnings? Lucas: They don't grow through volume. They grow through margins — refining, chemicals, and cost-cutting. Or through M&A, which we've seen a lot of. But the days of twenty percent annual production growth are over. The XLE is up just four percent this year, while the S&P 500 is up nine. Energy is no longer the high-growth sector. Luna: And clean energy stocks like the ICLN and TAN have been volatile but up recently. The ICLN is up one point four percent over the past five days, TAN up slightly. Is that a sign that money is rotating out of oil into renewables? Lucas: There's some rotation, but it's not a clean switch. Enphase, for example, is down nearly seven percent over the same period. So it's choppy. But the long-term trend is clear: renewables are gaining share, and the oil supply constraints reinforce that narrative. Luna: You know, Lucas, listening to you lay that out — the rig count decline, the well productivity drop, the shareholder discipline — it makes me think about something. If today's episode helped someone understand the energy markets a little better, that's kind of the whole point of this show. Lucas: Absolutely. And we keep the show ad-free and independent because of listeners who find value in it. If walking through the economy with us has made something click for you, the smallest way to support is at buy me a coffee dot com slash fexingo. Luna: Yeah, it's literally the price of a coffee. And it genuinely helps us keep doing this deep-dive stuff without any sponsor pressure. Lucas: So, back to the supply picture — one more data point that I think is telling. The number of drilled but uncompleted wells in the Permian has dropped to about nine hundred, down from over thirteen hundred in 2020. That's the lowest since 2014. So the cushion is gone. Luna: Which means if there's a supply disruption anywhere — say, in the Middle East or Russia — we don't have the US strategic reserve of DUCs to tap quickly. That's a real vulnerability. Lucas: Exactly. And OPEC+ knows it. That's why even with Iran reportedly exporting at a premium, the market hasn't crashed. The structural supply constraints are real, and they're likely to keep a floor under oil prices for the foreseeable future. Luna: So what's the takeaway for an investor or someone in the energy industry? How do you position for this new normal? Lucas: I think you have to accept that oil is no longer a growth industry in terms of volume. The value is in cash generation and return of capital. For clean energy, the tailwinds are stronger because high oil prices make alternatives more competitive. But it's not a straight line — there will be volatility. Luna: And for the average person filling up their car? Are we looking at sustained three-dollar-plus gas? Lucas: Probably, yes. Unless we see a major recession that crushes demand. But with supply constrained and the economy still growing, gas prices in the three-seventy to four-dollar range feel like the new normal. That changes consumer behavior over time — more interest in fuel efficiency, EVs, and public transit. Luna: It's a slower-moving shift than the headlines suggest, but the direction is clear. Lucas: Right. And that's what we're here to track — not the daily noise, but the structural trends that actually shape markets and the economy. US oil production growth has hit a wall, and that wall is going to define energy economics for years.