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The Permian Basin of Texas is the largest petroleum-producing basin in the United States. As of September 2018, the Permian Basin has produced a cumulative 33 billion barrels of oil and 118 trillion cubic feet of gas (U.S. Energy Information Administration, 2018). For some days, over four million barrels of oil a day have been pumped from the basin and that makes it the largest producing oil field in the world (Caldwell, 2019), exceeding that of the Ghawar in Saudi Arabia. At least one analyst suggests that the region might be producing upwards to eight million barrels of oil a day in less than four years (Domm, 2019).
The Permian Basin has been a major hub of oil and gas production for the United States for nearly 100 years (Enverus, 2021). Robinson (1988) wrote extensively about the hydrocarbon plays in the Permian Basin more than thirty years ago. Its production of hydrocarbons helps fuel various industries and provide key resources that aid in economic growth. The applications of oil production are not limited only to car, diesel, and plane fuel but also to other industries such as clothing, cosmetics, and plastic. Similarly, natural gas--a cheaper, cleaner hydrocarbon--is used for electricity generation, for space heating, water heating, cooking, lighting fixtures, and various other applications (Gaswirth et al., 2016). The supply and demand for oil and gas play a vital role in market fossil fuel energy prices and, hence, production. As market prices increase, the hydrocarbons’ operators or producers will increase their production to maximize their profits (Alquist & Kilian, 2010). Dynamically, this increase in supply has a negative effect on market price. Likewise, when prices decline, producers in the Permian Basin will decrease their production. Again, this has a stabilizing effect on market price. The cyclic nature of the industry incentivizes the producers to exploit high prices as much as possible.
Over the year 2020, the spot-market price of oil has been very volatile, varying by as much as negative $36/barrel to as much as $63/barrel for West Texas Intermediate (Y-Charts, 2021). The highest volatility ever seen in the spot market price of West Texas Intermediate occurred in the first half of 2020 because of a decline in demand due to COVID-19 and a spike in supply due to OPEC and partnering countries not adhering to production cuts (Barnett & Barron, 2020). Indeed, a contributing factor to production levels is the overall global political and economic climate. Turbulence in the oil and gas producing states or regions could mean potential disruption in global supply, which in turn, will motivate American operators to increase their production to accommodate global demand (Mohaddes & Raissi, 2019).
With horizontal drilling, the Permian Basin is producing a lot of gas that it can’t profitably sell. The horizontal drilling necessarily causes a lot of gas to be forthcoming out of the formation it is produced from (MacRitchie & Zobba, 2019). There appears to be no easy way to prevent this inadvertent production of gas from horizontal wells. When pipeline capacity is lacking, there is nothing that can be done profitably with the gas. The price to move gas to market is four to five times higher via rail or truck as compared to pipeline. A constant array of 750 tanker trucks loading and departing every two minutes, 24 hours a day, seven days a week is equivalent to the capacity of even a modest pipeline. The railroad equivalent of this single pipeline would be a train of 225 28,000 gallon tank railcars every day (Pipeline and Hazardous Materials Safety Administration, 2018). At today’s spot market prices for gas, it is not economical to ship natural gas by rail or truck.