Oil on Wild Ride; How Will It End?

Oil companies have announced spending cuts in the billions of dollars; oil service companies have announced layoffs of thousands of workers.

If companies stop drilling new wells in North Dakota and Texas, the centers of the U.S. oil boom, overall U.S. production could fall fast. Output from most of those wells declines far more quickly than production from more traditional wells. Analysts at Bernstein Research estimate that U.S. production declines at 30 percent a year without constant investment in new wells.

A quick decline in production would send prices higher by reducing global supplies. At the same time, demand could be on the rise. The U.S. economy seems to be improving rapidly and demand for gasoline is increasing. Global demand may also rise somewhat simply because low prices tend to encourage more consumption.

If the oil bulls are right, it means prices for transportation fuels would rise and the slowdown in drilling activity in the U.S. would perhaps be short-lived.

Oil Will Fall

Others say oil production is still rising and demand isn't yet catching up — a recipe for lower oil prices.

The oil bears argue that there are plenty of rigs still working, and they are now focused only on the most prolific spots. Also, oil services companies are charging significantly less for equipment and expertise. This means oil companies may be able to keep oil supplies rising from already high levels despite low prices.

The Energy Department reported last week that there was a record 1.18 billion barrels of oil in storage in the U.S. ITG's Dwarkin estimates that in the first half of this year the world will be producing, on average, 2 million barrels per day more than it will be consuming.