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The Economic Effects of Statoil’s Innovation

In: Business and Management

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In the mid-2000s, oil prices began to surge due to an increase in global oil consumption. Since oil production in conventional fields could not meet demand, oil prices continued to rise. With oil prices increasing, energy companies saw it profitable to begin obtaining oil from shale formations that were traditionally hard to drill using techniques such as hydraulic fracturing. Such techniques led to a boom in unconventional oil production. Due to these techniques, the United States alone has added 4 million barrels of oil per day to the global market since 2008 (Figure 1). However, such an increase in supply was initially masked by political conflicts in key oil regions (Figure 2). As oil companies in the U.S. continued to see productivity growth, the global market began to drastically change. Oil demand flatlined as economies weakened and cars became more fuel-efficient; this ultimately led to a surplus of oil (Figure 3) that caused oil prices to drop.
While companies have utilized hydraulic fracturing (“fracking”) to increase oil production in the U.S., they now are starting to feel monetary constraints due to increased marginal costs. Fracking a well is extremely sensitive to the law of diminishing returns, with output falling about 65% after the first year, causing new wells to be constantly drilled in order to maintain production (Plumer, 2015). However, the decreasing marginal product does allow companies to quickly adjust to falling oil prices by scaling back on new drilling. With producers in the U.S. operating at a breakeven price of $60 per barrel on average (Figure 4) and oil prices dropping to around $55 per barrel (Cooke, 2015), a lot of companies have began to cut the number of new wells being drilled. Even with the decrease in the number of new wells drilled, oil production has barely decreased (Figure 5), which can be attributed to producers…...

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