How Is Crude Oil Formed?

It is generally believed that crude oil was formed from the remains of animals and plants (called biomass) that lived millions of years ago. Over eons the biomass was covered by layers of mud, silt, and sand that formed into sedimentary rock. Geologic heat and the pressure of the overlying rock turned the biomass into a hydrocarbon-rich liquid that we call crude oil, and eventually forced it into porous rock strata called reservoirs. There are also formations or deposits of hydrocarbon-saturated sands and shale where geologic conditions have not been sufficient to turn the hydrocarbons into liquid.  

Wells are drilled into oil reservoirs to extract the crude oil. "Natural lift" production methods that rely on the natural reservoir pressure to force the oil to the surface are usually sufficient for a while after reservoirs are first tapped. In some reservoirs, such as in the Middle East , the natural pressure is sufficient over a long time. The natural pressure in many reservoirs, however, eventually dissipates. Then the oil must be pumped out using “artificial lift” created by mechanical pumps powered by gas or electricity.  Over time, these "primary" methods become less effective and "secondary" production methods may be used. A common secondary method is “waterflood” or injection of water into the reservoir to increase pressure and force the oil to the drilled shaft or "wellbore." Eventually "tertiary" or "enhanced" oil recovery methods may be used to increase the oil's flow characteristics by injecting steam, carbon dioxide and other gases or chemicals into the reservoir. In the United States, primary production methods account for less than 40% of the oil produced on a daily basis, secondary methods account for about half, and tertiary recovery the remaining 10%. Extracting oil (or “bitumen”) from oil/tar sand and oil shale deposits requires mining the sand or shale and heating it in a vessel or retort, or using “in-situ” methods of injecting heated liquids into the deposit and then pumping out the oil-saturated liquid.

What Affects Production Costs?

Reservoir characteristics (such as pressure) and physical characteristics of the crude oil are important factors that affect the cost of producing oil. Because these characteristics vary substantially among different geographic locations, the cost of producing oil also varies substantially. In 2007, average “lifting” costs (all the costs associated with bringing a barrel of oil to the surface) reported to EIA by the major private oil companies participating in the Financial Reporting System (FRS)¹ ranged from about $3.87 per barrel (excluding taxes) in Central and South America to about $10.00 per barrel in Canada. The average for the U.S. was $8.35 per barrel (an increase of 18.5 percent over the $7.05 per barrel cost in 2006).

Besides the direct costs associated with removing the oil from the ground, substantial costs are incurred to explore for and develop oil fields (called “finding” costs), and these also vary substantially by region. Finding costs averaged over 2005, 2006, and 2007, ranged from about $4.77 per barrel in the Middle East to $49.54 per barrel for the U.S. offshore. While technological advances in finding and producing oil have made it possible to bring oil to the surface from more remote reservoirs at ever increasing depths, such as in the deepwater Gulf of Mexico, the total finding and lifting costs have increased sharply in recent years. Much of this recent increase is attributable to the rapid expansion of the world economy and is likely to reverse direction as the economic growth has slowed or delined in 2008/2009.

Source: Energy Information Adminstration, Performance Profiles of Major Energy Producers 2007

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U.S. Crude Oil Production

The first commercial oil well in the U.S. was drilled in Titusville, Pennsylvania in 1859. Drilling activity and crude oil production expanded slowly to supply mostly lubricants and kerosene for use in lamps to replace whale oil. Production began to accelerate in the late 1800’s as crude oil refineries produced new petroleum products to meet demand for fuels and products by a rapidly industrializing country and the growing number of internal combustion engines. In 1859, U.S. production was about 2,000 barrels; in 1879 it was about 19 million barrels; and in 1899 it was about 57 million barrels. (A barrel contains 42 U.S. gallons.)  

U.S. crude oil production peaked in 1970 and has declined gradually since then. In 1970, domestic production of crude oil (including lease condensate²) averaged 9.64 million barrels per day (MMbbl/d). In 2007, total U.S. domestic crude oil production, including Federal offshore, averaged 5.06 MMbbl/d, a decrease of about 47% from 1970.

Source: Energy Information Administration, Petroleum Navigator

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Four States (Texas, Alaska, California, and Louisiana) produced 52% of total U.S. crude oil production in 2007. About 25 percent was produced on Federal Offshore-leases in the Gulf of Mexico (GOM), and the remaining 23 percent was produced in 24 other States and on Federal leases off the Pacific Coast (mainly California).

U.S. Crude Oil Production 2007 by Major Producing States and Federal Gulf of Mexico (Million Barrels per Day)

Source: Energy Information Adminstration, Petroleum Supply Annual 2007

World Crude Oil Production

Total world production of crude oil (including lease condensate,² but excluding natural gas plant liquids³) in 2007 was about 73.01 MMbbl/d.  The Middle East (which includes 12 producing countries) produced about thirty percent of the total, about 40 percent of which was produced by Saudi Arabia. Ten countries (out of a total of 96) produced 60 percent of total world production. The top five, which produced 42 percent of the world total, and their share of total world production were: Russia-13 percent, Saudi Arabia-12 percent, United States-7 percent, Iran-5.4 percent, and China-5.1 percent.  The Organization of Petroleum Exporting Countries (OPEC)⁴ with 13 members in 2007, produced about 32.2 MMbbl/d or about 44 percent of the world total.

Source: Energy Information Administration, International Energy Annual 2007 and International Petroleum Monthly

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1. For companies reporting to EIA’s Financial Reporting System (FRS). It does not include state-owned oil companies.

2. Lease Condensate: A mixture consisting primarily of pentanes and heavier hydrocarbons which is recovered as a liquid from natural gas in lease separation facilities.

3. Natural Gas Plant Liquids: Hydrocarbons in natural gas that are separated as liquids at natural gas processing plants, fractionating and cycling plants, and, in some instances, field facilities.

4. Organization of the Petroleum Exporting Countries (in 2007):  Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

More information on this subject can be found in the following EIA publications:
       Performance Profiles of Major Energy Producers
       Petroleum Supply Annual
       Monthly Energy Review
       Annual Energy Review
       International Petroleum Monthly
       International Energy Annual
       International Energy Outlook