American oil production expected to reach all-time high in 2018

The U.S. added 8 oil rigs just last week, representing a new demand for nearly 9 million truckload miles.

More production means more truckloads for 2018

The global marketplace for crude oil has changed beyond recognition since the historic collapse in oil and gas prices in 2014. In the past three years, the United States has transformed its energy economy from being a net importer of oil to a major exporter with volumes now larger than many of the smaller OPEC members’ exports combined. Reuters reported last month that American oil exports have grown so quickly that infrastructure capacity like pipelines, dock space, and ship traffic is being strained.

America’s flip from an oil importer to exporter changes the way that oil prices and production affect the trucking and transportation industries. Pre-2014, high oil prices translated to higher fuel costs for carriers, reducing their margins, and put downward pressure on U.S. economic growth. With the ubiquity of fuel surcharges, though, now trucking carriers pass higher fuel costs onto the shipper. Higher global oil prices will spur even more U.S. production, boosting economic growth and demand for truckload capacity. 

For each new American drilling rig that opens, carrier demand increases by 1.1 million truckload miles. Baker Hughes, which tracks U.S. oil rig data, counted 8 rigs that had opened between Nov. 17 and Nov. 22. This adds nearly 9 million miles to the US trucking industry. The number of American oil rigs is up by 330 since November 23, 2016 (or nearly 400 million truckload miles). 

In addition to pipes, drilling equipment, and raw crude, trucking also hauls things like fracking sand and plastic pellets to drilling sites. Oil is huge in specific modes–i.e. dry and liquid bulk and flatbed–but also has a secondary impact on demand for dry-van and refrigerated because of the economic multiplier effect. Plus, as drivers haul high-paying oil service loads to drilling sites, the capacity leaves the other modes of traffic, having an impact on the supply-demand equation and tipping the scales in favor of demand and driving up trucking rates. 

OPEC and Russia have teamed up in response to the United States’ emergence as the world’s largest oil producer—they agreed to cut production in January 2017 in an attempt to raise prices. “The production cuts are effective — it was absolutely the right decision, and the fact of striking a deal with Russia was crucial,” said Paolo Scaroni, vice-chairman of NM Rothschild & Sons and former chief executive officer of Italian oil giant Eni SpA. Yet “OPEC has not the same power. The U.S. becoming the biggest producer of oil in the world is a dramatic change.”

Hurricane Harvey, which shut down production and refinement on parts of the US Gulf Coast at the end of August, tightened supply somewhat. Rising global demand has arguably done even more to keep crude prices high. The irony is that OPEC and Russia are boxing themselves in: if cutting production is the only lever they have to maintain high prices in the face of rising American exports, they will continue to cede market share and their supply management efforts will accomplish less and less. 

“Now that they’re in it, I don’t see how they get out of it,” said Mike Wittner, head of oil market research Societe Generale SA in New York. Furthermore, the longer OPEC and Russia are able to keep prices high, the more emboldened American shale producers will be, which again will increase U.S. production and marketshare.

The International Energy Agency wrote, “The reality is that even after some modest reductions to growth, non-OPEC production will follow this year’s 0.7 mb/d growth with 1.4 mb/d of additional production in 2018.” In other words, non-OPEC oil production—led by the United States—is expected to grow at double the rate in 2018 that it did in 2017. 

Oil production in the U.S. is currently expected to reach an all-time high at an average 9.9 million bpd next year.

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John Paul Hampstead, Associate Editor

John Paul writes about current events and economics, especially politics, finance, and commodities, and holds a Ph.D. in English literature from the University of Michigan. In previous lives John Paul studied Shakespeare in London and Buddhism in India, but now he focuses on transportation and logistics in the heart of Freight Alley--Chattanooga. He spends his free time with his wife and daughter herding cats, collecting books, and walking alongside the Tennessee River.