The resurgence of U.S. oil and ExxonMobil's $60 billion deal are not the only indicators of the industry's recovery.

• Last week, domestic oil production reached a record high, signaling a complete recovery from the Covid pandemic after drilling decreased by more than 25% between pre-Covid peaks and a low in early 2021.
• The comeback of the oil industry is being fueled by the Permian Basin in Texas, where ExxonMobil is acquiring Pioneer Natural Resources for $60 billion, and which offers low production costs per barrel and easy pipeline access that yields faster returns than offshore drilling.
• Despite Wall Street's pressure for years, oil and gas companies have increased production by 3 million barrels/day from the bottom and could potentially increase it by another 1 million barrels by 2025.

In October 2021, the U.S. Department of Energy declared that U.S. crude oil production had reached a record high of 13.2 million barrels per day, completely erasing the Covid-19 losses of over 3 million barrels per day.

The $60 billion deal between and independent oil producer was announced a day later, and the subsequent recovery of production, Wall Street's pressure for cost control, and consolidation, such as the Exxon-Pioneer merger, were not mere happenstances.

In 2021 and 2022, the energy sector experienced a significant recovery from a decade of losses for Big Oil, which resulted in tens of billions of dollars being spent on unprofitable fracking wells. Additionally, the consolidation of the industry was beneficial for company profits, dividends, and shareholder returns.

According to Rob Thummel, senior portfolio manager at Tortoise Ecofin in Kansas City, Mo, the foundation of the 2010s oil business was already cracking before Covid broke it. Monthly production topped out at 13 million barrels per day in November 2019 and hit 9.9 million by February 2021.

"Oil is currently priced at $85 to $90 a barrel, and capital discipline in the U.S. industry remains," he stated.

So, what brought Big Oil back, and what's next?

Seven crucial factors have influenced U.S. oil's past and will shape its future.

Why the shale drilling bust ended

The oil market experienced a gradual decline and then a sudden drop between 2014 and 2019, resulting in a 40% loss of value. However, the pandemic accelerated the decline, with Wall Street pressuring for additional cuts in capital spending, according to Thummel.

What brought it back was renewed demand and higher prices.

After the 2020 recession, oil demand has gradually recovered, and rising prices have made previously unprofitable plays profitable, according to him.

The U.S. production rebound is more concentrated

Despite the increase in production in some regions, Big Oil's presence in America remains limited. In Oklahoma and North Dakota, production is still significantly reduced, and Alaska's long-term decline continues. Additionally, offshore oil drilling in the Gulf of Mexico has only recovered to 2 million barrels a day and has not experienced any growth.

The Permian Basin region of Texas and New Mexico is where the surge in oil production is occurring, according to Alexandre Ramos-Peon, head of shale well research at Rystad Energy. Production costs in this region are among the lowest in the country, with oil from the Permian Basin costing an average of $42 a barrel to produce, compared to North Dakota's high $50s to $60.

While North Dakota faces challenges with limited pipeline access, Texas has a more relaxed regulatory environment, allowing many producers to use pipelines entirely within the state. This contrasts with places like Colorado, where output is still down 3 million barrels per month due to stricter regulations.

He stated that Texas lacks understanding of energy regulation.

Where oil companies have been spending their money

In 2014, U.S. oil companies spent $199.7 billion on capital expenditures, but this amount decreased to $106.6 billion in 2019, according to Statista. This reduction in capital spending may have contributed to the decline in oil production and potentially delayed the recovery. Instead of investing in new projects, oil companies used the saved funds to pay higher dividends and engage in stock buybacks, as stated by Thummel.

In the last year, oil and gas companies paid out approximately $75 billion per quarter, with the share of oil-company operating cash flow going to shareholders increasing to 50% from about 20% in 2019, according to Energy Department data.

The link between Exxon-Pioneer deal and peak barrels

Despite the decline in capital spending, the oil industry has been able to recover due to higher productivity per well. The Baker-Hughes rig count is still only half of 2018 levels, but the average production per rig of new wells has increased to 1,000 barrels a day, up from 668 four years ago. This means that the industry did not need to drill in as many new places or add a lot of new wells to recover fully.

Last week on CNBC, Darren Woods, CEO of ExxonMobil, stated that the company merged with Pioneer due to the belief that its technology and scale could increase the productivity of Pioneer's fields.

"Their capabilities, with their Tier 1 acreage, our technology, and our development approach, result in higher recovery at a lower cost," Woods stated.

As rivals like also make moves to increase their presence in U.S. shale, especially in the Permian Basin, Chevron has already made several shale-related acquisitions in recent years, including $7.6 billion for PDC Energy this year and $5 billion for Noble Energy in 2020. However, independent producers are under more pressure than more-stable super-majors to pay very high dividends to justify the risk of oil-price fluctuations, which will mean tighter constraints on their ability to keep up in technology and scaling of operations, according to Hatfield.

U.S. crude, energy security and Big Oil economics

Is American repatriating its oil as a result of the rebound in crude? According to Hatfield, Permian shale is currently more profitable, has less political risk, and takes less time to make a profit than offshore oil. This is why companies like Exxon are investing more heavily in Permian shale than offshore drilling.

""Offshore development is being reduced by super-majors due to its increased risk," Hatfield stated."

Ramos-Peon stated that the biggest part of the equation is that time equals risk. While global oil producers are not afraid to invest in regions with unstable governments, the long-term investment cycles in offshore drilling make the shorter turnarounds in Texas more appealing to companies like ExxonMobil, which is a major offshore player in the industry.

"The return on investment in the Permian is much faster and higher because the wells begin to produce so quickly," Hatfield stated.

What oil's recent trading and Israel-Hamas mean for gas prices

The price of crude oil has decreased from $94 to $88 per barrel, resulting in a 20-cent per gallon drop in the nationwide average price for regular gas. However, the coordinated production cuts by OPEC in June have driven up prices by 35 cents, which offsets the actions of domestic producers. Additionally, there is uncertainty about whether the Israel-Hamas war will lead to a reduction in production from Iran, whose government supports the Hamas rebels who attacked Israel.

"If there are sanctions against Iran, that will negatively impact consumers."

Short-term shale plays, oil consumption and climate change

The short-term benefits for oil companies do not alter the long-term direction of the oil market or carbon reduction.

Ramos-Peon stated that achieving climate goals requires long-term changes in energy consumption rather than short-term production targets. Rystad predicts that U.S. oil production will increase to 13.6 million barrels per day next year and 13.9 million in 2025. However, forecasts become more challenging after this point due to the potential for significant changes. By the end of the decade, oil consumption is expected to peak before beginning to decline, according to Rystad.

Despite the growing popularity of electric cars, the demand for oil from older vehicles and its use in chemicals will keep the oil industry large, according to Ramos-Peon. Additionally, the risk of the business declining will prompt drillers to prioritize shale drilling over offshore drilling, as predicted by Hatfield.

"If you're uncertain, why wouldn't you prefer a return on your investment in three years instead of 30?" he asked.

The biggest threat to the rosy scenario is the sharp decline in oil-industry cash flows from a peak last year, as shown by the Energy Department's survey of 139 producers, which revealed a 36% drop in second-quarter operating cash flows from 2022. This is the first time in two years that profits are narrowing.

Since the end of the second quarter, the price of crude has increased by $16 per barrel, and in the oil industry, pricing is crucial.