"The best cure for higher prices is higher prices
" is often used about economic principles and market dynamics. It suggests that when prices of goods or assets increase, it can prompt a chain of reactions that helps to alleviate or correct the situation.
In supply and demand dynamics, this phrase implies that higher prices incentivize producers to increase their production or attract new market entrants. As prices rise, it becomes more profitable for businesses to invest in production, expanding supply.
Higher prices can also reduce demand as consumers may become more reluctant to purchase goods or services at elevated prices. This decrease in demand can create a natural corrective mechanism, as reduced demand can eventually lead to lower prices.
Overall, the phrase suggests that market forces, driven by the interaction of supply and demand, work to restore equilibrium. When prices are high, the resulting incentives and adjustments in production and consumption can eventually stabilize or decrease prices.
Production in the United States accelerated when oil prices were elevated above $100 per barrel on a WTI basis in early 2022. The acceleration has continued into 2023. The U.S. has moved full steam ahead with oil production matching historic levels.
U.S. Oil Production
U.S. oil production surged higher in the last couple of years. According to the Energy Information Administration, U.S. oil production has increased 8.2% yearly, rising to 13.2 million barrels
daily from 12.2 million in January 2023. In January 2022, U.S. oil production was approximately 11.7 million barrels
per day. In the wake of the war in Ukraine, the United States has accelerated its production.
The region with the highest oil production in the United States is the Permian Basin, which spans parts of Texas and New Mexico
. It has been a significant contributor to oil production growth in recent years due to advancements in drilling techniques, such as hydraulic fracturing (fracking), and the presence of vast shale oil resources.
The United States has accelerated its production by using new technologies. Hydraulic fracturing, or fracking or hydrofracking
, is used to extract oil from underground rock formations. It involves injecting a fluid mixture at high pressure deep into the ground, typically thousands of feet below the Earth's surface, to create fractures or cracks in the rock. These fractures allow the trapped oil to flow more freely and be extracted.
Fracking involves well drilling. A well is drilled vertically or at an angle into the target rock formation, often a shale or tight sandstone containing natural gas or oil.
Steel pipe sections, known as casing, are inserted into the well and cemented to provide structural integrity and prevent groundwater contamination.
A mixture of water, sand or other proppants
, and additives is pumped into the well at high pressure. Water typically makes up most of the fluid, while additives help reduce friction, control bacteria growth, and enhance fracking effectiveness. The inclusion of proppants, like sand or ceramic beads, props open the fractures to allow gas or oil to flow.
The pressurized fluid fractures the rock, creating interconnected pathways or conduits that enhance the flow of gas or oil from the rock formation to the wellbore.
After the injection, the pressure is relieved, and the fracking fluid and gas or oil return to the surface. This initial phase is called flowback. Once the flow back ends, production begins, and the gas or oil is extracted from the well. Fracking has significantly expanded the production of natural gas and oil in some regions, such as the United States, by enabling access to previously inaccessible resources trapped in tight or shale formations.
Why is the U.S. Increasing Production?
Not only does the U.S. have the technology
, but it also has an abundance of shale oil resources: The United States is rich in shale oil deposits, particularly in regions like the Permian Basin in Texas and New Mexico, the Bakken Formation in North Dakota, and the Eagle Ford Formation in Texas. These regions have been significant contributors to the growth in U.S. oil production.
Increasing domestic oil production helps reduce dependence on foreign oil imports, enhancing energy independence and national security. It provides a more stable and reliable domestic energy supply while potentially reducing the country's vulnerability to geopolitical risks and disruptions in global oil markets.
A rise in oil production can have significant benefits, including job creation, increased tax revenues, and economic growth. The oil industry's expansion has stimulated various supporting sectors, such as equipment manufacturing and services, and has contributed to local and regional economies.
There are a slew of regulations on companies looking to produce oil; despite these regulations, production has surged. The oil and gas industry in the United States is regulated by several federal agencies, including the Environmental Protection Agency (EPA), the Bureau of Land Management (BLM), and the Department of Energy (DOE).
Before commencing oil production activities, companies are typically required to obtain drilling permits from the relevant regulatory authorities. The permit process may involve submitting detailed drilling plans, environmental impact assessments, and evidence of financial responsibility for potential clean-up and damages.
In some instances, oil production on federal lands or offshore areas requires the payment of royalties to the government. The BLM or the Minerals Management Service (MMS) typically oversees the collection of these payments.
States also have their regulations governing oil production activities. These regulations often address spacing, production reporting, wastewater disposal, and bonding requirements.
Higher Prices Can Lead to Accelerating Oil Production
The relationship between oil trading prices
and production is complex and influenced by various factors. Generally, higher oil prices can incentivize increased oil production in several ways. Higher oil prices make oil extraction from more costly or marginal reserves economically viable. Producers can invest in technologies and exploration to extract oil from challenging or unconventional sources, which might not be profitable at lower prices.
Higher oil prices can attract increased investment in exploration, drilling, and infrastructure development. This investment can lead to the discovery and development of new oil fields and the expansion of existing ones, ultimately boosting production.
Higher oil prices can spur technological advancements
in the oil industry. Innovations in drilling techniques, such as horizontal drilling and hydraulic fracturing (fracking), have enabled access to previously inaccessible oil reserves, contributing to higher production levels.
Oil companies may respond to higher prices by expanding production at existing wells or accelerating the development of new drilling projects. This situation can lead to increased output in the short and medium term.
Higher Oil Prices Can Lead to Demand Destruction
Higher oil prices often translate into higher gasoline prices at the pump. This scenario can reduce consumers' disposable income, leading to reduced spending on other goods and services, especially in sectors such as transportation and travel.
When oil prices rise, industries heavily reliant on oil, such as airlines, shipping, and manufacturing, can experience increased operational costs. This situation can lead to reduced profitability, job cuts, and lower demand for their products or services.
Higher oil prices can incentivize consumers and businesses to seek alternative, more cost-effective energy sources. This situation may include transitioning to electric vehicles, utilizing natural gas instead of oil for heating, or investing in renewable energy options. Such shifts in energy consumption patterns can lead to decreased demand for oil.
When oil prices are high, individuals and businesses are often motivated to adopt energy-saving measures and implement more efficient practices to curb fuel consumption. This scenario can further contribute to a decrease in oil demand.
Oil Demand Generally Rises with Lower Oil Prices
Oil demand generally tends to rise with lower oil prices
. Lower oil prices often lead to lower fuel costs, making it more affordable for consumers and businesses to purchase and consume oil products. This can result in increased consumption of gasoline, diesel, and other petroleum-based products, especially in sectors like transportation and manufacturing.
Lower oil prices can stimulate economic activity by reducing business production costs and promoting economic growth. This can increase overall energy demand, including oil, as industries expand and consumer spending rises.
Lower oil prices can make travel more affordable, boosting demand for air travel, road trips, and other forms of transportation. This effect is particularly evident in the tourism industry, where lower fuel costs can encourage people to take vacations or engage in leisure activities that involve travel.
The petrochemical industry uses oil as a feedstock to produce various products such as plastics, fabrics, and chemicals. Lower oil prices can reduce the cost of raw materials for these industries, prompting increased production and potentially higher oil demand.
The Bottom Line
Higher prices have led the United States to accelerate production. Additionally, the U.S. has used geopolitical risks to increase production and make the United States a self-reliant source of oil. The war in Ukraine