Oil and the Bakken Boom

The summer driving season is underway, and it is an election year, so we can expect gasoline and oil prices to garner (even) more attention than usual.  (And expect more griping too!)  It’s early in the driving season, so instead of reminding you that you just spent $85 filling your Chevy Suburban, I decided to kick off the season with some encouraging news. First, gas prices are going down. Secondly, a greater portion of our petroleum expenditures are staying within our borders because domestic oil production is on the rise, especially in North Dakota.

The changing dynamics of America's oil supply is quite surprising because of the scale and speed at which the change is occurring. (The Washington Post had a good article about the subject this past weekend). In just a few years, the US went from seemingly being held captive by OPEC nations, to diversifying suppliers and increasing domestic production. We went from importing 60% of our liquid fuels in 2005 to 45% last year. US crude oil imports from OPEC nations dropped nearly 23% between 2008 and 2011.[1] And, as noted in the Washington Post article, North Dakota went from producing just a few thousand barrels of oil per day a decade ago to nearly half a million barrels today.

The growth in North Dakota production is astonishing. According to the Energy Information Administration (EIA), North Dakota produced about 153 million barrels of crude oil in 2011.[2]  Crude oil production in the Peace Garden State increased 144% between 2008 and 2011.  Only Texas, Federal Offshore developments, Alaska, and California produced more crude oil in 2011. North Dakota, however, is about  to supplant Alaska and California any day now (see graph below). 

The Bakken Shale formation is fueling North Dakota’s (and the country’s) oil production boom. High oil prices and the development of new drilling technologies is causing drillers to increase exploration, and allowing the extraction of oil from geologic formations - like the Bakken - once thought of as technically infeasible.

The Bakken is in northwest North Dakota and extends into Montana and Canada. Drilling in the Bakken began in 1953, but it took over 35 years before 100 wells were producing simultaneously. At that time in 1989, the average well produced 44 barrels of oil a day, resulting in monthly production of about 142,000 barrels.  From there, daily productivity steadily declined to a low of 8 barrels of oil per well in 2004. [3]  Then the boom began.

Since 2005, Bakken oil production has increased 24896%,[4] and now makes up about 89% of North Dakota’s oil production.[5]   Between March 2011 and March 2012, the number of active oil wells in the Bakken increased 62% to 3672, and the average well produces 139 barrels of oil per day. [6]  A record number of oil rigs - 214 - are currently exploring and creating new wells.[7]  North Dakota’s 2012 oil production is on pace to reach 192 million barrels, which is roughly equivalent to 12.5% of our 2011 crude oil imports from OPEC nations.[8]

The development of the Bakken is good news for the economy. North Dakota’s unemployment rate is currently 3%, which is lowest in the country, and much less than the national average of 8.1%.  Plotting oil production jobs (classified as mining and logging) in North Dakota shows a trajectory similar to the state's oil production. (See graph below).

The growth in the Bakken and other domestic reserves is also good for our balance of trade and energy security. (And it scares other countries too).  However, higher domestic production does not completely insulate us from future oil shocks because oil is priced on the global market. 

There are also concerns about environmental impacts associated oil drilling and consumption. Unfortunately, our economy is heavily dependent on petroleum, and alternatives have yet to displace a significant portion of our oil demands. It is important for oil producers to act in the safest and most environmentally responsible manner possible. Otherwise the economic and environmental costs can be devastating (just ask BP and the Gulf Coast). It is imperative that oil production (and energy policy in general) strikes a proper balance between economic, environmental, and national security considerations.

The good news is we're on the right track: we are producing more oil, importing less, andusing less of it.