Electricity Consumption in the Permian Basin

Source: Cicala (2020)

The price of oil plummeted below $20 per barrel during March and April, leading to an unprecedented contraction in activity in the U.S. oil and gas sector. As happened during the last oil price crash in 2014-2015, drilling of new wells has been grinding to a halt. More than half as many rigs are operating now in the United States compared to in mid-March, according to the latest numbers from Baker Hughes. The active rig count is now at an all-time record low.

But unlike 2014-2015, producers are doing more than just halting drilling of new wells. They’re actually cutting production by shutting in wells they already drilled in years past. The signature of these production cutbacks is unmistakable in electricity use data. Electricity use in the West Texas Permian Basin has plunged by 24 percent since COVID-19 restrictions, relative to pre-COVID levels. Compare that to neighboring Houston. Electricity usage there dipped an average of only 1.7 percent below the pre-COVID baseline. The difference? Shut-ins of thousands of wells, many of which are powered by electric-powered pumps.

These decreases in power use are associated with an unprecedented decrease in U.S. oil production. Using a variety of data on refinery activity and crude oil stockpiles, the EIA estimates that U.S. oil production has fallen by 1.5 million barrels per day over just the past two months. Apart from production curtailments caused by major hurricanes in the Gulf of Mexico, there has not been a comparable production collapse since the EIA began keeping records in the 1980s.

Over the past few weeks, the oil price has crept back up to above $30 per barrel as, with easing restrictions, Americans start to get in their cars again. But will this higher price lead to a quick U.S. oil production recovery? Keep your eye on electricity use data, which may be our best leading indicator of whether U.S. oil production will recover anytime soon.