Blog Post

By: Thomas Holst

Oil field metrics in the Uintah basin confirm a resurgence in oil and gas activity. The current Uintah basin rig count is 12, up from three a year ago. Operating permits issued to energy companies for exploration and production activity has also increased. This upswing in activity was triggered by a steady rise in oil prices to $64 per barrel from a low point of $30 per barrel in early 2016.

What factors caused the decline in oil prices since 2016? First, the Organization of Petroleum Exporting Countries (OPEC) shifted their practices in late 2015 when Saudi Arabia, the senior member, rejected its traditional role as the OPEC “swing” producer that lowers its own oil production to compensate for other OPEC members who exceeded their assigned production quotas. When Saudi Arabia rejected its role as the “swing producer”, OPEC members oversupplied the global market with oil, driving prices down.

Second, OPEC members believed a steep dip in oil prices would decrease U.S. shale oil production since costs of shale production are higher than conventional oil production costs. Shale technology had transformed the U.S. from a net energy importer to a net energy exporter over the last decade. OPEC’s logic was that lower crude oil prices would suppress shale oil production activities, thereby causing the U.S. to revert back to a net importer of energy.

What went wrong with OPEC’s logic? Ultimately, OPEC members such as Kuwait, Libya, Iraq, and Angola (all recovering from collapsed economies caused by wars) suffered the economic pain of lower oil prices most acutely because energy accounts for over 40 percent of GDP in these countries. By contrast, the U.S. energy sector accounts for only 8 percent of US GDP.

How did OPEC respond? In light of shrinking financial reserves, both OPEC and Russia decided to cut oil production through year-end 2018, signaling a new phase of co-existence between U.S. shale oil producers and OPEC.

In conclusion, Utah fared well during the downturn in local oil & gas sector activity. On one hand, Utah’s diverse economy continued to grow on the back of continued strength across all sectors. On the other hand, Utah automobile owners in 2016 tanked up with motor gasoline one-third less expensive compared to pump prices in 2014. However, pump prices are now poised to increase over the near term. Finally, renewable energy sources such as solar, wind, and geothermal will continue to expand their role in Utah’s energy mix as they seek to replace more expensive fossil fuels.

Thomas Holst is a senior energy analyst at the Kem C. Gardner Policy Institute.