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THE ECONOMIST: There’s $70…and then there’s $70

🕐 2 min read

Advances in technology have reduced the cost to produce oil, contributing to the current high level of activity in truly amazing ways. Only three years ago, $70 per barrel almost shut down the industry; today, it accelerates an ongoing surge.

For more than three years from early 2011 through mid-2014, the price of crude oil trended around $100. At that level, the primary focus was (naturally) on getting oil out of the ground and sold as quickly as possible. Then prices plummeted, and within a few months, crude was selling for half of peak prices, even dipping below $30 per barrel in early 2016.

Inefficiencies that were tolerated at $100 per barrel were no longer acceptable, and technologies that could improve cost and production parameters gained ever greater importance. Advances have taken several forms. Some wells have been “refracked” to bring the latest techniques to wells originally developed with older methods. More sand, finer sand, and other improvements along with lessons learned over time are being used to increase output from older wells. Efforts to use and dispose of water more efficiently are also being widely applied.

Various other techniques are also improving the economics of wells, such as using microorganisms to help flow. The game changer, however, is digitization and the potential for artificial intelligence (AI) to dramatically raise production potential while simultaneously reducing costs.

The use of AI can improve virtually every aspect of the process of finding and producing oil and natural gas. Vast amounts of data from sensors can be rapidly analyzed using AI to help locate reserves and even determine the precise mix of sand, water, and chemicals to use during completion to maximize production. With AI, much of the data analysis work can be done by machine, allowing humans to make decisions faster and with better information. Issues can be detected more rapidly, and simulations can help identify optimal solutions.

It’s difficult to understate the dramatic changes on the horizon for all of society as AI becomes more widely implemented. Energy is but a harbinger of things to come. In the oil and gas industry, major market players are expecting technology advances by 2050 to increase recoverable oil reserves by around 50 percent and reduce costs by 30 percent, with digitization accounting for a significant proportion of the improvement.

Technological advances have greatly improved the ability to find oil and gas, optimize well completion, and recover more product. Fracking opened up unconventional reserves and revolutionized the industry. The changes from digitization and AI have the potential to be at least as profound. Thanks to this seismic shift that has emerged in only three years, there’s $70…and then there’s $70!!

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M. Ray Perryman is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

Ray Perrymanhttp://www.perrymangroup.com
Dr. Ray Perryman is President and CEO of The Perryman Group, an economic research and analysis firm based in Waco, Texas. His firm has served the needs of more than 2,500 clients, including two-thirds of the Global 25, over half of the Fortune 100, the 12 largest technology firms in the world, 10 US Cabinet Departments, the 9 largest firms in the US, the 6 largest energy companies operating in the US, and the 5 largest US banking institutions.

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