Stability is making it easier for oil and gas companies to get back to work: North America is becoming much more productive 

Oil prices have been on a roller coaster ride since OPEC announced that the group would no longer prop up prices in November 2014. The precipitous drop in prices created a new environment that was difficult for the oil and gas industry to adjust to, but almost two years later, it appears the sector has done just that. Technologies and techniques that were introduced at $100 oil have been mastered at sub-$50 oil, and companies are beginning to move forward.

“The environment where we went from $100 oil … to $26 oil last February is not an environment where companies will do anything,” Wunderlich Director of Equity Research and Chief Market Strategist Art Hogan told Oil & Gas 360® at EnerCom’s The Oil & Gas Conference 21. “As stability comes back, production starts to come back online, and we start to see some increased capex. That’s happening because of [price] stability, but it’s also happening because North America is becoming much more productive.

“If someone at this conference had said two years ago that they were economic at $45 oil, they would have been laughed out of the room. Fast forward two years… and we’re being a whole lot smarter about how we look for hydrocarbons. We’re not just drilling holes in the ground and hoping for the best,” Hogan added.

Increased efficiencies could cap prices 

Improved operational efficiencies have made it possible for certain oil and gas producers to make money, even at today’s oil price, but that improvement may also prevent oil prices from reaching triple-digits for the next decade. U.S. shale production has become so efficient that as prices increase and more acreage becomes economic, increased output will prevent prices from climbing much higher.

“Supply sets a ceiling on price,” said CIBC Capital Markets Managing Director and Chief Economist Avery Shenfeld. “When we get a recovery in price, we might see increasing U.S. supply that matches demand growth,” but this will keep downward pressure on the price of crude oil.

“It’s about finding what price we need to incentive the growth in supply that a growing global economy actually needs,” said Shenfeld.

Most of that growth will be coming from emerging markets, just as it has for the past decade, said Shenfeld. Consumption on a per capita basis in China and India are still well below levels seen in more developed countries, and even as growth in China slows, energy consumption in both countries will grow.

Developed markets like the U.S. and Canada will continue to grow as well, said the CIBC economist. “Two percent is the new four percent,” said Shenfeld. “We used to think that 4% growth, maybe 3.5%, was a pretty good year. Now, [in the U.S.,] we think 2% growth is a pretty good year.” While the U.S. is currently below that 2% mark, Shenfeld and CIBC expect growth to reach that level by next year. “In Canada, growth has been even slower. The energy sector is an even larger part of the economy… Canada is going to have to find some replacement for the growth that the oil oil sector used to bring.”

The U.S. will likely remain a leader in economic growth, but challenges remain

While China continues to outpace the U.S. in absolute terms of growth, it is on a slowing trajectory, said Credit Agricole Chief Economist Michael Carey. “Over the next decade, you can still count on the U.S. to be the leader in terms of growth,” he told Oil & Gas 360.

“We have a well-balanced economy, strong consumers, and right now, we’re at relatively low levels of unemployment with low interest rates. It’s a good place to receive foreign investment and continue growing at about trend-pace,” said Carey.

The slower growth and low interest rates do present problems for policy makers, however, Carey added. “When we look around the globe, this slowdown seems to be consistent with lower interest rates and low inflation. I think one reason behind this is productivity growth; for example, in the U.S., productivity growth is barely 0.5% per year, so when you add in things like changes in the age of the labor force, or population growth, you really get a potential rate of growth of really only around 2%, which is slower than it used to be. The policy maker challenge will be, how do we juice more growth [from the economy] given that we have this low potential, and we can’t cut interest rates much further.”

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