The resilience of U.S. shale producers has surpassed all expectations as they have wrung extra efficiencies out of their operations and pulled rigs back to the most prolific sections of existing plays.
The shale sectorâ€™s ability to cut costs and sustain their output in the face of plunging prices has been extraordinary and testament to the entrepreneurial spirit and technical skill of the independent producers.
Shale producers are justifiably proud of their ability to survive the perfect storm that has hit their industry since the middle of 2014. But it should not disguise the fact that the collapse in oil prices has paused the shale revolution, with the sectorâ€™s focus shifting from growth to survival.
The revolution cannot be reversed. Techniques once mastered will not be unlearned. And adversity has forced shale drillers to become more efficient. If and when prices rise, shale output is very likely to start increasing again, and from an even lower cost base.
For the time being, however, lower prices have stunted shaleâ€™s growth in the United States and slowed its spread around the rest of the world.
In North Dakota, the oil boom has stalled as low prices have brought formerly rapid production growth to a standstill since the end of 2014. State oil output grew at an compound average rate of just 0.38 percent per month over the last 12 months, according to records published by the Department of Mineral Resources.
By contrast, production increased at a compound rate of 2.37 per month in the 12 months before prices started to crash in June 2014. Output has been flat at 1.2 million barrels per day (bpd) since the end of 2014, the deepest and most protracted pause since the shale revolution began in the state in 2005 .
If production had continued rising on its pre-June 2014 trend, output would now be 330,000 bpd higher at 1.52 million bpd. Some analysts question whether the Organization of the Petroleum Exporting Countries (OPEC) is winning its price war against high-cost producers.
They point to resilience in shale production in North Dakota and Texas as evidence that OPECâ€™s strategy has had only limited success.
But the correct comparison is with what would have happened if prices had remained at the pre-June 2014 level of over $100 per barrel and OPEC had cut its own production in a bid to support them.
In that case, North Dakota production would probably have grown to over 1.5 million bpd by now and reached almost 1.7 million bpd by the end of 2015. By allowing prices to tumble, OPEC has shut in 300,000 to 500,000 bpd of probable shale production growth in North Dakota.
For the United States as a whole, crude and condensates production would have hit 11.3 million bpd by the end of 2015 if it had continued increasing along the pre-June 2014 trend . Instead, the U.S. Energy Information Administration predicts production will end the year at around 9.0 million bpd (â€œShort Term Energy Outlookâ€ Oct 2015).
The gap of more than 2 million barrels between actual and pre-June 2014 trend output illustrates why prices could not have remained above $100 and the crash was necessary to rebalance the market.
Herbert Stein, chief economic adviser to President Richard Nixon, once observed that â€œif something cannot go on forever, it will stopâ€ (â€œEssays on economics, politics and lifeâ€ 1998). In the case of oil prices and the shale revolution, U.S. production was on an unsustainable trajectory so prices have fallen and the trend has stopped.
The 2 million barrel gap is also an indication of OPECâ€™s success shutting in shale production growth and pushing the oil market onto a new trajectory. The 2 million barrel gap is a very rough calculation and should not be taken too literally: the real gap could be 1.5 million or even 1.0 million barrels.
But coupled with demand growth of around 1.5 million bpd in 2015, up from less than 1 million bpd in 2014, it is a measure of how far the oil market has come in terms of rebalancing.
The oil market remains oversupplied, but the oversupply would have been far worse if prices had not fallen by more than half over since the middle of 2014.
OPECâ€™s strategy, in reality a Saudi strategy, of holding output steady and forcing other countries to adjust their own production has been reasonably successful and there is no reason to discontinue it now.
In any event, it is not clear either Saudi Arabia or the organisation as a whole had much alternative in 2014, or has much choice now. Some countries, including Venezuela and Iran, have indicated OPEC should cut production and aim for a price of $70 or even $80 per barrel.
But while most shale producers are struggling with prices below $50, many are ready to start increasing output again if U.S. crude prices hit $60 or $70, which would worsen oversupply in the short term.
There has been a lot of speculation about which countries are the intended target of Saudi Arabiaâ€™s and OPECâ€™s decision to maintain output, allow prices to fall, and curb high-cost production. U.S. shale producers (authors of the shale revolution), Russia (for geopolitical reasons), and Venezuela (also for geopolitical reasons) have all been mentioned.
But Saudi and OPEC officials have been careful to say their target is to restrain â€œhigh-costâ€ production rather than shale. Shale is mid-cost production, at least in the most prolific and well-understood plays like Bakken, Eagle Ford and Permian.
In any event, Saudi Arabia and OPEC cannot target any particular group of producers. The pain of low prices is widespread. OPEC has no control over who buckles first.
By increasing their efficiency, shale producers have pushed more of the adjustment onto non-OPEC non-shale producers (NONS) in the North Sea, the Arctic, deepwater, megaprojects and frontier areas, as well as weaker members of OPEC in Latin America and Africa.