History doesn’t repeat itself, but it does rhyme

  • Baker Hughes rig count statistics show how drilling reacted to earlier falls in the oil price. There is always a time lag of months between an oil price event and a change in drilling. There are faint signs of US drilling starting to turn down and quite clear signs that Middle East OPEC drilling has turned down.
  • Drilling in Iraq is down significantly from 94 oil rigs in July to 56 rigs in October, but there are likely other reasons for that.
  • The oil industry in the USA and the Middle East has changed markedly in the last decade and I believe the production response to reduced drilling will be much more pronounced in both areas than before. History doesn’t repeat itself, but it does rhyme (Joseph Anthony Wittreich).

Figure 1 Baker Hughes rig count for the USA and oil price described in the text. Note how peaks and troughs in drilling lag the oil price. Also some uncertainty in drilling strategy the last three years as oil price fluctuated within narrow bounds. But the oil price has now broken down and I believe it is inevitable that drilling follows. Never before has US oil production been so heavily linked to drilling activity.


Figure 1 shows the extraordinary development of drilling in the USA over the past 20 years. Back in January 1995 there were 726 rigs drilling. Come 2008 that number had swollen to over 1900. Since then there has been no growth in the rig fleet – I don’t know why. Until the crash of 2008 the focus was on gas, mainly shale gas, but then during the post-crash recovery there was a huge migration away from the gas patch to the liquids plays of The Bakken and Eagle Ford. The cyclical rise and fall of drilling is closely linked to the oil price (and of course also the gas price) with variable time lags for the drilling industry to respond to the price signals.

The current oil price crash is almost as steep as during the great crash. But starting from a lower height and with as yet no clear sign of the reason, it will likely not sink as low as 2008. Since 2004 supply and demand for total liquids has grown in a remarkably steady way, despite the turn down associated with the biggest financial crisis in living memory. Click on Figure 2 for a large version and you will just about be able to discern that production has risen a tiny amount above the long-term trend, a few hundred thousand barrels at most. I still suspect that most of current price weakness is demand related and foretells of economic woes for some large oil consumers – the OECD, China, Russia and of course OPEC.

Figure 2 Global total liquids production according to the International Energy Agency (IEA) shows a remarkably stable growth trend. Production = Consumption = Demand ± Storage balanced by price. For 5 years, OPEC has managed the production part of this equation until now.

Following the 2008 crash US drilling activity plunged (Figure 1). It may look immediate so here are the numbers for total US rigs:

Jul-08 1923
Aug-08 1988
Sep-08 2002
Oct-08 1964
Nov-08 1923
Dec-08 1771
Jan-09 1543
Feb-09 1308
Mar-09 1092
Apr-09 984

And here is the oil price (WTI $/bbl):

Jul-2008 133.37
Aug-2008 116.67
Sep-2008 104.11
Oct-2008 76.61
Nov-2008 57.31
Dec-2008 41.12
Jan-2009 41.71
Feb-2009 39.09
Mar-2009 47.94
Apr-2009 49.65

The oil price peaked in July two months ahead of the crash that began in September. Drilling peaked in September and only began to fall rapidly in December. The recent rig count statistics (below) show that drilling may have peaked in September but it is still too early to say. I expect mass abandonment of drilling to begin in December or January. Maybe someone close to the industry can elaborate in comments. The oil industry in Aberdeen is in the process of winding down activity dramatically.

Jul-14 1876
Aug-14 1904
Sep-14 1930
Oct-14 1925
Nov-14 1925

You just have to look at Figure 1 to appreciate that US oil production has never found itself in this position before. Maintaining and growing light tight oil (LTO) production is dependent upon continually drilling thousands of wells. The slow down in drilling, that seems inevitable, will therefore feed through to LTO production falling. But the fall may not be immediate since the LTO process involves drilling and fracking and then hook up to export. According to recent email from Rune Likvern there is a backlog of 600 wells awaiting completion. And so production may continue to rise even with drilling stopped, pouring gasoline on the bonfire of price collapse. But when LTO production does peak, the subsequent decline will be rapid, perhaps of the order 20 to 30% per annum. With about 3 Mbpd LTO in N America, this may wipe a few hundred thousand bpd off N American production.

Middle East OPEC

OPEC has changed a lot in the last decade. Prior to 2005 the cartel always had several Mbpd production shut in, supporting oil prices (Figure 5). But then in the great oil bull run OPEC was called upon to produce flat out with spare capacity falling close to zero in late 2004 (Figure 5). Prior to 2005, the Middle east OPEC countries did hardly any drilling (Figure 3) they didn’t have to. But then they suddenly discovered that to meet rampant demand they had to drill more wells and the rig count for the four big producers doubled from 40 to 80.

Figure 3 Rig counts for the big 4 ME OPEC producers. Iraq and Iran are not included because there is a paucity of data.

Figure 4 Actual oil production for OPEC + spare capacity (see Figure 5).

Figure 5 OPEC spare production capacity. Often viewed as imaginary by many peak oil commentators, you only have to observe how spare capacity merges with production to give a total capacity number to realise that political OPEC production fluctuations are real (Figure 4). Spare capacity fluctuations of 2 Mbpd or more have not been uncommon in recent years in order to balance the global oil market.

The rig count has since risen to 140 in Saudi Arabia, UAE, Kuwait and Qatar. But all that drilling has not added to OPEC’s production capacity (Figure 4), though the picture is clouded by Libya, Iraq and Iran all at various stages of debility. The main point is that previously immortal ME OPEC production is passing relentlessly into the mortal world of other producers where it is necessary to drill new wells in order to maintain production levels.

ME OPEC and the rest of OPEC, who derive much of their national income from selling oil that supports generous social services in many of the member countries, will now have to decide if they are to continue spending on drilling and other development activity or divert these funds to support government spending. I would bet on the latter and believe that we may already see a slow down in drilling activity in the ME OPEC nations (Figure 3). This will feed through to a reduced production capacity, and so, while OPEC decided to not make a political cut, given time a physical cut will happen nonetheless. Estimating how deep this cut will be and when is impossible without a precedent. This time next year, we may know.


In perusing the rig count statistics, Iraq caught my eye. It is not included in Figure 3 because the data only start in June 2012 and the scale is surprisingly different to the other main producers. Iraq had 96 wells drilling in June 2014 compared with Saudi Arabia’s 69. I’m not sure if Iraq includes Kurdistan.

The main point about giving Iraq a space of its own is to note the recent sharp fall in drilling activity (Figure 6) that is presumably linked to the IS led insurgence in that country. Consequences currently unknown and unpredictable.

Figure 6 The Iraq oil rig count has fallen dramatically in recent months. Reason = IS, consequences for production unknown, but not positive.

Rest of World

The main point of this post was to focus on the drilling statistics of the USA and ME OPEC. But it is worth musing about the rest of the world, especially an area I know quite well, the UK North Sea. Six months ago, the North Sea needed $150 / bbl to keep going. $100 oil had postponed the decommissioning of many fields where the infrastructure is rotting under the burden of north sea water and taxes. One does not need to be a rocket scientist to work out what sub $70 oil is going to do to an area like this. The industry had been working “eye balls out” to keep things going, spending vast sums, actually creating a lot of prosperity. But it appears the music has stopped.


The only thing that has changed in the world is that Saudi Arabia and partners have decided to not shave a couple of million barrels of production for a few months in order to maintain the stability in the oil market (see figure 5). Demand and supply fluctuate by this amount from year to year. Leaving the market to work instead will I believe result in about a couple of million barrels per day being wiped off global production capacity, not uniformly, but selecting the highest cost producers. In OPEC Venezuela looks in bad shape. In the OECD, US LTO and the mature parts of the North Sea. The exporting nations, with state owned operators, will prioritise welfare over drilling.


Rig count data from Baker Hughes.
Oil production data from the IEA OMR.

Related posts

Drowning in oil again
Global Oil and Other Liquid Fuels Production Update
The 2014 Oil Price Crash Explained
Peak Oil in the Rest of the World

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12 Responses to History doesn’t repeat itself, but it does rhyme

  1. Euan Mearns says:


    Exclusive: New U.S. oil and gas well November permits tumble nearly 40 percent

    Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

    Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

    PS this is the 5000 comment on EM.

  2. Conor says:

    I think the reason the US rig count hasn’t increased since 2008 is the change from vertical to horizontal wells.

    The capability of the rigs has increased, if not the total quantity.


  3. Sam Taylor says:


    One of my worries re LTO is it’s fairly rapid project turnaround time compared to larger conventional projects. Well payback can occur within something like 2-3 years, and production comes on stream very rapidly. This presumably will lead to a more rapid output response to changes in the oil price. In production systems with information feedback delays (oil price doesn’t change instantly in response to a change in production/demand), increasing how quickly you respond to an information feedback has the counter-intuitive side effect of setting off increasing oscillations in how much you produce vs the desired supply level. The way to dampen these oscillations is, paradoxically, to slow your response time. I’m quite worried that by introducing a rapid-response component such as shale into the oil market, it’s volatility is going to significantly increase. This might well be the first sign of that.

    Closer to home, already seeing some response to falling prices in my dealings with firms. Quite a few discounts being requested as a result of in house cost-cutting measures. Going to be a rough year I suspect.

  4. Skeboo says:


    Thanks for the charts!

    Does anybody know how the IEA estimate the total spare capacity for OPEC?


    • Euan Mearns says:

      I think this is largely based on information provided by national governments. Many folks treat spare capacity with scepticism, but if you look at Figure 4 you will see that spare capacity + production provides a very smooth picture of total production capacity. The ± 2 to 4 Mbpd adjustments in OPEC production are real. Total spare capacity may be overestimated by about 1 Mbpd. So the margins are wafer thin.

      • Skeboo says:

        Alright, thanks. Are you by any chance aware of any source that have looked beyond the official statements of governments?


        • Euan Mearns says:

          The EIA used to report OPEC spare capacity but stopped doing so a few years ago owing to budget cuts. But they will have been using same sources. Try this..


          • Skeboo says:

            That’s quite helpful to understand how it is calculated indeed.

            I guess i asked the question in the first place since i was wondering how KSA could account for 90% of these 3.5Mbpd while i think i read R Patterson claim many times they were producing flat out. Is the reality somewhere in between?


          • Euan Mearns says:

            Ron views OPEC spare capacity through a different lens. On two occasions in 2005 and 2008 Saudi spare capacity fell to 1 Mbpd and it was widely held then they were in fact pumping flat out. So when their spare capacity rises to 3, that maybe means the real number is 2. Qatar, UAE and Kuwait probably have spare capacity proportional to Saudi. Iraq, Iran and Libya all bets are off. The other countries probably zero.

            That 1 mbpd spare capacity that the Saudis didn’t produce is probably sour heavy oil fro the Safania field that could not be refined. But the Saudis have been building a refinery to refine it – not sure what the status is there.

  5. Bert van den Berg says:

    The US has/had ~10X as many rigs operating as the ME OPEC, but produces ~1/4 as much oil. Pretty clear that ME is (relative to the US) still in the immortal category.

    LTO drill/complete cycles are measured in months (right?). The production from these wells is something like <20% of original within 2 years. I think this means that the Saudi's need to keep the taps open for 2-3 years in order to see most of the current LTO bloom to fade in US production, and prices to recover . This short cycle probably encouraged their tactics. On the other hand a 3 year pause in US drilling will likely chase a good number of companies out of business.

  6. Aslangeo says:

    Just looking at a proprietary report on US onshore from a consultancy – in 2014 only 3% of US onshore wells produce at peak over 800 BOPD (8% of capital cost), 15% 400 to 800 (30% of capital), 15% 200 to 400 (20% of capital), 10% 100 to 200 (15 % of capital) and 53 % under 100 BOPD (23% capital). In 2004 90% of onshore wells were under 100 BOPD.

    The dogs (100 BOPD wells) are responsible for less than 10% of production today, and were responsible for 40% of production in 2004.

    This shows the scale of technical innovation in the last 10 years

    However, basically the US is at the mechanically recovered meat stage, Middle east OPEC are still eating sirloin steak

    • Euan Mearns says:

      However, basically the US is at the mechanically recovered meat stage, Middle east OPEC are still eating sirloin steak

      That’s a good way of putting it. ME OPEC could easily produce more given OECD style investment. In USA, a drilling slow down will slow or halt production growth. From memory about 50% of reduction in US oil imports is from a fall in demand. And about 50% of production growth is from non-shale developments – EOR etc. In 2004, some onshore production was from stripper wells that only came on when the price was high – not sure at what price that production gets switched off.

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