The Outlook for U.S. Production of Shale Oil

This paper models the production of energy from shale resources and examines the outlook for that production. Four key regions account for most U.S. oil from shale. Drilling activity in those regions is modeled as operating along an elastic supply curve, which has drifted down over time as mining productivity has improved. The elastic response of production to prices is gradual, making production insensitive to prices in the short run but quite sensitive within two to three years. That model, coupled with a forecast of crude oil prices that the Congressional Budget Office published in January 2016, indicates that the rig count, a simple measure of drilling activity, will probably fall until mid-2016. Thereafter, the gradual response of production to that decrease in drilling activity is expected to cause shale oil production to decline until mid-2017; the fastest rate of decline will probably occur in mid-2016. After 2017, however, continued improvements in mining productivity are expected to help production of shale oil regain its early-2015 peak by 2020 despite much lower prices than those in the 2013-2014 period. The large medium-term response of production to prices means that, absent a major supply shock, oil prices are unlikely to stray outside a range of $33 per barrel to $73 per barrel for a sustained period during the next five years.