DID THE US SHALE OIL REVOLUTION RUIN OIL INDUSTRY STOCK MARKET RETURNS?

Samuel D Barrows

doi:10.32479/ijeep.9171

Abstract

The stock market performance of the US oil industry is evaluated against a combination of benchmarks before and after the US shale oil revolution, in order to ascertain whether the increase in US shale oil production had an adverse impact on oil industry stock market returns. In 2014, the dynamic of the global crude oil supply-demand situation was such that the oil price fell because of the increased US crude oil production. Saudi Arabia and the other major producers preferred to have low oil prices, at least temporarily, in order to penalize the US shale oil players. Any oil price increase since then is seen as leading to an increase in US crude oil supply which then further reduces oil prices. The oil industry outperformed the benchmarks prior to the ramp up of US crude oil production led by the shale oil revolution, but the industry underperformed the benchmarks after these production increases. Hence, the US shale oil revolution did ruin the oil industry stock market returns. Several topics for discussion are included: The US Shale Oil Revolution; World Crude Oil Markets; Crude Oil Price Dynamics in the US; and Crude Oil Price Impacts on Oil Companies. Keywords: Shale Oil Revolution, Crude Oil Price, Oil and Gas Industry, Stock Market Returns JEL Classifications: Q32, Q41, Q43 DOI: https://doi.org/10.32479/ijeep.9171

Highlights

In 1946, US crude oil production was at 4.75 million barrels per day, and after a continuous two-decade production increase, US crude oil production peaked at 9.64 mbpd in 1970 (EIAProd, 2019)
The research question is: Did the US shale oil revolution ruin the oil industry stock market returns? The objective of this study is to evaluate the stock market returns between the 2 time periods
Case 1 at 0.40 and case 4 at 0.45 which utilized the US market as a benchmark are followed by case 2 at 0.31 and case 5 at 0.41 which utilized the West Texas intermediate (WTI) crude oil price as a benchmark

Summary

Introduction

In 1946, US crude oil production was at 4.75 million barrels per day (mbpd), and after a continuous two-decade production increase, US crude oil production peaked at 9.64 mbpd in 1970 (EIAProd, 2019). Following significant development and project work, including the construction of the Trans-Alaskan pipeline, the Alaskan North Slope full field development saw significant increases in production in the state of Alaska during the late 1970s and peaked in 1988 at 2.02 mbpd (EIAAlaska, 2019). Despite the success in Alaska, crude oil production in the US continued its long decline hitting 5.00 mbpd in 2008, the lowest level since 1946 (EIAProd, 2019). Shale oil production, known as tight sands, and classified as unconventional production resources, was on an upsurge, from 373 thousand barrels per day (kbpd) in 2003, shale oil hit 554 kbpd in 2008, a 20% increase from 2007 (EIAShale, 2019). All was not lost in the US oil industry at this point in time, even though this may not have been apparent to outside observers

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