Bye-Bye Saudi America
The end of US energy independence
Technological innovation — particularly in the Permian Basin in Texas — has transformed America into the world’s top producer of both oil and natural gas. Having extracted more than 13 million barrels of crude oil per day on average in 2024, the US has left both Saudi Arabia and Russia far behind. Prevailing economic forecast suggests that US oil production will continue to rise for a few more years, then flatline for the foreseeable future. Or will it? The Permian Basin, responsible for half of US oil extraction and by far the largest source of production growth worldwide, has come closer to its geological limits than ever before. If it were to roll over it would not only mean an end to US oil production growth, but an abrupt halt to increases in natural gas extraction, too, pushing global hydrocarbon production into decline. Join me on a wild ride starting in Earth’s ancient past and ending with machine learning models to see how deep the rabbit hole goes. Buckle up, ’cause Saudi America is going bye-bye.
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The Ancient Past
The Permian Basin is situated in the westernmost corner of Texas on the border with New Mexico. It is named after the Permian geologic period, and contains some of the world’s thickest deposits of rocks from that age. At the start of the Permian — some 300 million years ago — the area was situated along the western margin of the supercontinent Pangaea, about 10° north of the equator. Back then almost the entire Western and Midwestern territories of what we call today the United States was subject to moderate subsidence. A shallow warm sea occupied the area, with all sorts of weird creatures lurking beneath the waterline and chasing each other onshore.
During this era, some 50 million years before the first dinosaurs appeared, conditions were ideal for the accumulation of large amounts of carbon rich sediment on the seafloor. Due to a lack of oxygen in the shallow warm waters most of the dead plants and animals could not properly decompose, and thanks to the rivers nearby were quickly covered with thick deposits of silt. Dead organisms over time have thus become trapped in a 2,100 to over 4,200 meters (seven to fourteen thousand feet) thick layer of sandstone and siltstone. As global sea levels changed over time (and as the land was uplifted) water eventually evaporated, leaving behind a crust of salt. That in turn was again covered by sediment and later soil.
Over the eons and under the immense pressure and heat from the rock formations dead sea creatures have slowly been turned into oil and natural gas. The sediment not only trapped algae and other deceased organisms, but large amounts of seawater, too. Oil and gas, which is lighter than water, began to rise on top and was forced towards the surface. There it encountered the impenetrable layer of salt and became trapped in the small caverns and crevices of the rock. The rest remained encapsulated in the tiny pores of the source rock, with hole diameters smaller than the width of a human hair.
Primates with a power drill
Many millions of years later a particularly rapacious tribe of humans arrived to the area, covering more than 86,000 square miles (220,000 km2) and began extracting the oil:
“In 1920, a trickle of oil (10 barrels per day) at the Westbrook Field started a flurry of exploration activity in the region. […] The early finds were followed by more discoveries, primarily in the carbonate sections (75% of total production). Deeper sections were explored and over 1,300 significant discoveries have been made here. After the 1973 peak in production, a steady decline in production ensued, slowed by enhanced recovery and ‘rediscovered’ oil in older fields in the 1980s and 90s. That decline has now been reversed, rising steadily since early 2011, using both new and old technologies. Waterflooding and CO2 injection, horizontal drilling, deeper drilling, and multi-stage hydraulic fracturing are all being used to recover and discover new reserves.”
Conventional crude oil production in the Permian Basin peaked in 1973, after having reached 2 million barrels of daily petroleum output, then began to decline steadily just as all other fields in the lower 48 states did. Since 2011, however, Permian crude oil production was on the rise again. Last year it has reached an impressive output just shy of 6.5 million barrels per day, making the Permian responsible for half of the US output, which is quite a feat. Output has been pretty flat from August to December 2024, though, which — together with an unexpected dip in January — has put the basin’s future production growth potential into question.
Despite record US crude oil production last year (13.2 million barrels), limits to growth have started to emerge. And here we must tie back to the little geology lesson in the beginning of the article. As we have seen, the accumulation of carbon rich sediment in the area was a one-off event in Earth’s history. No new source of oil has been added since the formation of the Permian, only more and more energy intensive methods discovered how to extract the oil in place. First came the traditional drilling method: punching holes through thick layers of sandstone and salt. Then, as more and more oil was lifted, pressure in the reservoir has dropped to a level where oil companies had to resort to enhanced oil recovery (such as injecting large amounts of CO2 underground) to continue with extraction. Since we are talking about a finite amount of liquids accumulating in the small crevices of the rock, even that method proved to be inefficient over time.
Then came the 2008 financial crisis and the subsequent investment spree (thanks to zero interest rate policies). This flood of money, together with high oil prices of the time (well above a $100 a barrel between 2011 and 2014), has kicked off the fracking revolution, responsible for today’s insane production figures. Thanks to this investment spree the Permian has become the prime source of production growth all across the US and the fastest growing oil region around the world. And while smaller shale plays (Bakken, Eagle Ford, Marcellus, Niobara) have stopped growing relatively fast, the Permian seemed to be inexhaustible. By the end of 2023 the Permian remained the only meaningful source of US oil production growth. The rest of the oil fields, scattered around the lower 48 states, failed to maintain a steady increase in crude output, let alone recover to pre-2020 levels. (In fact world oil production outside the US has peaked in November 2016, and has failed to recover to that level ever since.)
Geology, again, plays a crucial role here. Due to its unique location, the Permian Basin ended up having one of the thickest and most carbon rich sedimentary layer on the planet from all oil rich regions of the world. Its 2100 to 4200 meters thick sandstone and siltstone deposit is unique on the planet. This means, no matter how much we would like to believe that the same miracle can happen all across the world once conventional methods prove to be inadequate, the odds of finding such a high-yielding shale play is extremely low. But what is so special about fracking?
Fracking targets the source rock of oil, from where it originally migrated into the larger crevices of the rock above. This extraction method involves drilling boreholes tens of thousands of feet long along the layers of sediment — often horizontally. Then, after the well has been cased with steel pipe and cement (to prevent it from collapsing on itself) small holes are blown through the pipe by explosive charges, and large amounts of fracking fluid (water, chemicals and sand) is pumped underground to fracture the sedimentary rock. The sand keeps those fissures in the rock open, even as the fluid is pumped out then discarded. (We are talking about no small amounts here: often hundreds of truckloads of sand and water has to be delivered on site per well.) Finally when suction is applied oil begins to flow in crazy amounts.
The problem with this method is twofold. First, good drilling spots are not evenly distributed across the land. Sweet spots are often close to each other, and when wells are drilled too close together a pressure-drop in one means a similar fall in output in the other. And while many argue that drilling techniques have improved a lot during the past one and a half decade, which I’m sure they did, oil companies have become much better in finding these sweet spots also. Besides that they have also learned how to place their wells at an optimal distance to each other, to avoid cannibalization... And with the advent of AI this detection and optimization process has just become even more sophisticated. So, what’s the problem with that? Well, you can only place so many wells in a finite area approximately 250 miles (400 km) wide and 300 miles (480 km) long. Once oil companies run out of sweet spots (or prime acreage as they call it), they will have to drill in less than optimal locations and crude oil production can be expected to drop sharply.
“Eventually average new well productivity falls in all plays even with better technology as all the well locations in ‘sweet spots’ have been drilled and new wells are moving into poorer quality geology.” — Earth scientist David Hughes
And this leads us to the second issue with fracking, namely that production from freshly completed wells peaks in a year then begins to decline sharply, falling 75–90% in the first three years of operation. Companies fight this tendency by re-fracturing the source rock (thereby reusing the same well once its productivity falls too low) or by drilling longer and longer laterals. These methods have increased the total output per wellhead, but also gave rise to steel pipe and fracking fluid demand. Again, just as with sweet spots, once we run out of these once highly productive wells, it looks increasingly unlikely that we can repeat the same feat with other wells drilled on anywhere less then prime acreage.
Revenge of the sea
There are other rather disturbing signs indicating that we are approaching the limits of the one and only Permian Basin. The reasons, as usual can be found in geological history. Do you remember how and where shale deposits were formed? Yes, under warm shallow seas which, after evaporation, left a crusty layer of salt on top — trapping both carbon rich sediment and lots of salty groundwater underneath. Under the immense pressure of the rocks above — as well as from the heat below — dead organisms were eventually cooked to perfection, leaving the heavy salty brine below and lifting oil and natural gas on top. (Just like making a stew from fatty meat leaves you with a layer of oil on the surface of the dish.)
Naturally, when drilling a well crude oil is targeted first, but since oil companies cannot completely avoid neither the accompanying natural gas nor the ancient seawater, all three eventually have to be brought to the surface. At first, most of the stuff lifted is crude oil, with some gas and brine mixed into it. Hence the immense returns on investment — both in terms of money and in terms of energy — often in the tune of 1:100. One barrel worth of energy invested, a hundred barrels returned. Not bad, huh? Well, those times are over now for a very-very long time. Nowadays oil companies are more than happy if they can reach a 1:10 ratio, with 1:7 being the average, or as low as 1:4 in case of some wells.
To measure the performance of oil fields companies have come up with metrics such as gas-to-oil and water-to-oil ratios. According to the latest data, the Permian is already in the process of gassing out:
The gas-to-oil ratio (GOR) has risen steadily from around 3,100 cubic feet of natural gas per barrel of oil produced (cf/b), or 34% of total production in 2014, to 4,000 cf/b, or 40%, in 2024, the EIA said.
The EIA classifies wells with a GOR of more than 6,000 cf/b as gas wells, not oil wells.
Energy companies market the gas. But that raises costs — they must treat it, and build or lease space on pipelines to deliver it.
Higher gas-to-oil ratio and water-to-oil ratio in the Permian suggest that some formations in the basin are reaching geological constraints, and more drilling will not result in a proportionate increase in the amount of oil produced. Mind you this is completely independent from the price of oil: no matter how much you pay at the pump, producers will still have to drill more and more wells and get rid of more and more (unwanted) byproducts. Just take a look at produced water ratios:
The water-to-oil ratio in the Permian is much higher than in other basins. On average, four barrels of water are produced for each barrel of oil, according to data from oilfield water analytics firm B3 Insight cited by Reuters.
While the Permian crude production is set to exceed 6.5 million bpd in 2025, up from more than 6 million bpd in 2024, the basin “is simultaneously generating an unprecedented volume of produced water — a costly and complex byproduct of hydrocarbon extraction,” B3 Insight said this week.
Four barrels of water for each barrel of oil… Just how much is that? 26 million barrels per day…? With each barrel being equivalent to 42 gallons, that is more than a billion gallons — or 4.1 million cubic meters — of salty, chemical-laced, highly corrosive, oil contaminated water every single day, or almost 400 billion gallons (1.5 cubic kilometers) a year. That’s a lot.
“The Permian is much of a water and gas business with oil as a secondary product there” — Chris Doyle, CEO of Civitas Resources
The question poses itself: what’s there to do with all this water? There are three options: discarding it (releasing it into rivers), injecting it underground and processing it for further use. The first option is the cheapest but also the most destructive to the environment. Injection induces earthquakes as water has to be squeezed back into some pretty tight rock formations under immense pressure. Treatment involves expensive machinery and equipment (plus delivery) all of which, on the other hand, leaves oil companies with an increasing financial (and energetic) costs. Ever wondered why the energy return on energy invested gets worse and worse as the best resources deplete? Here is your answer.
This ever increasing energy, material and capital cost to dispose of produced water isn’t good news for US oil producers, who are already concerned with the US Administration’s preference of a $50 a barrel oil price. At a four-to-one water-to-oil ratio, for example, we are talking about $2 spent on water treatment for each barrel of oil produced. While this doesn’t sound that much, ever increasing water (and natural gas) treatment costs could very well prove to be the straw that broke the camel’s back. As an executive at an exploration and production firm wrote in comments to the Dallas Fed Energy Survey for the first quarter of 2025:
“There cannot be “U.S. energy dominance” and $50 per barrel oil; those two statements are contradictory. At $50-per-barrel oil, we will see U.S. oil production start to decline immediately and likely significantly (1 million barrels per day plus within a couple quarters)”
At crude oil prices below $65 (partially thanks to the market scare following the announcement of tariffs (1)) we can already see trouble brewing. Quote:
Breakevens to drill a new well in the Permian averaged $65 a barrel in 2024, up $4 on the year, according to the Federal Reserve Bank of Dallas. Less desirable acreage breakevens can hit $96, per Novi Labs, some $26 above where a barrel of crude is trading.
Ripple effects
The Permian is a unique monster of a shale play. But even unique monsters have only so many sweet spots and so many economically recoverable oil in their bodies. Once decline sets in in the last growth region of the US, that will mean the onset of the long decline in both oil and natural gas production, putting a definitive end to a brief period of US energy independence and dominance. With deepwater drilling delayed due to low oil prices, high capital investment needs and long lead time for special drilling rigs to arrive, the roll over of the Permian will also signal the onset of a global oil and gas production decline sending off ripples across the planet. Drilling in the high seas is not going to save us.
“We think that between 2027 and 2030 it’s likely that the US will see peak production, and after that some decline” — Occidental CEO Vicki Hollub
Contrary to the overly optimistic forecast by the EIA, at such low oil prices it will increasingly become impossible to sustain high levels of oil production, let alone growth. Thanks to depletion as well as worsening gas-to-oil and water-to-oil ratios, the industry would need higher and higher prices over time — something which the deeply indebted economy and the increasingly immiserated workforce can no longer afford.
And it doesn’t stop with oil. Since about 25% of US natural gas production comes from fracked oil wells (as associated gas, most of it originating from the Permian) a drop in oil production there will instantly result in a significant drop of natural gas production, too. The US has produced 103 billion cubic feet of dry natural gas per day in 2024 while its industries and constituents consumed 90 bcf during the same time period. This means that a mere 10% drop in output would completely erase the liquefied natural gas (LNG) export potential of the entire nation, stranding liquefaction assets in an instant. Make no mistake: the US leadership class will curb exports much sooner than that (as soon as Henry hub prices begin to rise significantly), leaving not only investors, but also Europeans twisting in the wind…
With the recent slow-down of oil production from the Permian the rollover from growth to decline may have just arrived. According to energy analysts Goehring and Rozencwajg:
Across all fields, our linearizations suggest that basins will roll over when approximately 28% of their reserves are produced. Our machine learning models show oil shales are now 28–32% depleted, while gas shales are 30–34% depleted. This points to a slowdown driven by depletion, not price or regulation.
With other proximate data (rising gas-to-oil and water-to-oil ratios) confirming their prediction I believe it’s high time we start planning for a soon to be declining oil production in the US and around much of the world. The brief reign of ‘Saudi America’ is about to come to an end.
Until next time,
B
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Note: the title of this post is a reference to Saudi America — The Truth About Fracking and How It’s Changing the World by bestselling author Bethany McLean from Columbia University Press.
(1) At the time of writing stock and commodity markets are in a Black Friday firesale mode. But, it could get worse still. Tariffs, if they are here to stay long enough, could very well induce a global recession. The world (outside the US) obtains its dollars from its trade surplus with America. Since tariffs are essentially a tax paid by importing companies, their imposition will immediately translate into higher inflation in the US and thus lower consumption. That means a thinning out of order books in countries producing those goods, and a sudden drop in dollar revenue to them. Poorer nations, as a result, could suddenly encounter enormous difficulties paying back their debts denominated in dollars, while richer ones will stop reinvesting their dollars into stocks and bonds in the US… They will need all the USD they obtain to pay their suppliers who are also desperate to get a hold of some greenbacks. This sudden lack of dollars could simultaneously result in a bank-run on the stock and bond market and a frenzied search for a replacement. (BRICS trading units, perhaps? Bitcoin is nowhere scalable enough to take the dollar’s place…) Needless to say, with the imposition of such a high tariff regime all production growth plans of manufacturing companies have gone south, even in the US (as they source most of their components from outside their borders). Hence the demand for oil can be expected to drop, further reducing futures prices on commodity markets. And if oil prices stay low thanks to subdued demand across the world, then global oil production could turn into an irreversible decline even sooner than expected.
