Oil & Well Construction: Slowing Economic Outlook
- Ed Sullivan
- Aug 14
- 5 min read
Updated: Oct 3
Market Update
Introduction
Oil prices are expected to decline this year and next which will impact inflation, consumer spending, some regional economic performances, drilling activity, and oil-well cement consumption in the United States. Each of these factors impact the near-term outlook for the economy and cement consumption. This article looks at each of these factors and their net impact on construction activity.
Oil Price Outlook: Global Economic Activity
The outlook reflects slowing global economic activity, accelerated OPEC and non-OPEC production, and strong shale production in the U.S. Geopolitical risks that disrupt supply from Iran, Russia, Venezuela, or the flow of oil through the Strait of Hormuz pose significant upside risks to these projections.
The World Bank recently cut its economic growth forecast. The slower growth outlook reflects high interest rates, weakened export demand, disrupted supply chains, and elevated uncertainty that slows down investment. Indeed, nearly two-thirds of the world’s economies have downgraded their outlook because of these factors. In addition, weakened domestic demand and tariffs have slowed down growth in China. China’s footprint on world economic growth is large. Combined, these factors reduce demand for oil.
On the supply side, OPEC plans to boost production to recapture market share, much of which it had lost to U.S. shale producers. OPEC, especially Saudi Arabia, has committed to accelerated production to regain share. OPEC has added production of 1.78 million barrels per day (mbpd) this year. More increases are expected through the third quarter of 2025 with the total production increase to 2.75 mbpd.
According to the International Energy Agency, daily supply of oil is estimated at 105.6 mbpd. In comparison, demand is currently at 103.0 mbpd. This imbalance is the reason oil prices have dropped $10 per barrel this year. Given the supply and demand dynamics, the supply imbalance will widen and more downward pressure will materialize on oil prices. This imbalance is expected to remain in place throughout 2025 and all of 2026 – which means further price erosion.
Oil prices are expected to decline this year and next according to the United States Energy Information Administration (EIA). West Texas Intermediate started the year at nearly $76 per barrel. Currently, it stands at slightly more than $66 per barrel. That translates into a 13% decline. The EIA expects the price to weaken further throughout 2025 and 2026 – eventually reaching a low of $56 per barrel. A recent survey of oil economists suggests downside risks to these forecasts.
Economic Impacts to Lower Oil Prices
Lower oil prices will ease inflation. For every $10 decline in oil prices, it results in roughly a 0.3% decline in consumer inflation. That reflects the direct effects of lower fuel prices and indirect effects that includes lower production and distribution costs. This implies that some of the increase in inflation that is expected to materialize later this year and in 2026 will be partially offset by lower oil prices. Keep in mind, other secondary effects, such as a weaker dollar, will also be at work and may counter this benefit.
By lowering inflation, household purchasing power is enhanced. Perhaps the largest benefit accrued from lower oil prices is lower gasoline prices. For every $1 decline in prices, gasoline at the pump declines as much as 2.5 cents per gallon. Based on EIA estimates, oil prices are expected to decline $11 per barrel in 2025 and nearly the same amount again in 2026. The average gasoline price in the U.S. is currently $3.16 per gallon according to AAA. With the expected declines in oil prices, gasoline prices should decline to $2.82 per gallon by year-end, and roughly $2.50 per gallon by year-end in 2026.
Based on one and a half cars per household, that translates into 70 gallons per month for the “typical” household. With 132 million households that translates into roughly savings of $18 billion in 2025 and almost the same for 2026. Roughly 70% of total U.S. economic activity is consumption activity. This adds roughly 20 basis points to U.S. economic growth.
From a monetary policy standpoint, falling oil prices give the Federal Reserve more room to ease rates should broader disinflation continue. In addition, if the decline in prices reflects deteriorating global demand, a signal of broader economic weakening ahead, it may prompt the Fed the cut a bit earlier than expected.
Oil Cement Economic Impacts - Including Cement Consumption
The decline in oil prices also has negative impacts. Drilling activity will ease. And with it, oil-well cement consumption. Oil-well cement consumption accounts for a small share of total cement consumption but plays a more important role in states like Texas, North Dakota, Pennsylvania, and New Mexico.
With U.S. rig counts already flattening, further price declines below breakeven levels (typically $55–$65 per barrel for shale producers) could trigger further drilling cutbacks. Reductions in drilling will likely focus on areas other than the Permian Basin or Eagle Ford. According to a Dallas Federal Reserve survey, these producers have the lowest breakeven point (low $50’s/barrel). Elsewhere shale producers’ breakeven point tends to be as much as $10 higher than the lower cost producers. According to the EIA, prices are expected to reach $54 per barrel. Those prices imply marginally profitable production in the Permian Basin and Eagle Ford, and losses elsewhere.
Reduced production in the U.S. is exactly Saudi Arabia’s desired result from their increases in oil production. Recognizing their breakeven is $20 or lower, the Saudis can leverage this cost advantage to drive out U.S. producers. They did this in 2014, resulting in $150 billion in debt and the bankruptcy of 35 oil exploration and development companies. In 2014, the economy recorded solid and accelerating growth. This is not the case today. As a result, the Saudis' strategy could result in even stronger adverse consequences for domestic oil producers.
Oil well drilling has been declining since 2023. It recorded a significant decline in 2024 (-10%). Year-to-date (July), oil-well, rig count has further declined 12% with further drops expected - leaving the total rig decline at nearly 17% for 2025. By year-end 2026, the EIA expects oil prices will reach $53 per barrel resulting in a projected additional drop of 8%. As the U.S. and world economies regain footing, oil demand is expected to increase and lead to price firming and modest gains in drilling during 2027 through 2030.
The decline in oil-well cement demand that began in 2024 is expected to continue through 2026, roughly mirroring the percentage drop in oil prices. That implies that oil-well cement consumption will steal roughly 30-35 basis points off 2025 growth and roughly another 15 to 20 basis points in 2026. The sector is expected to support growth in the out years of the forecast.
In summary, all of this analysis weighs heavily on oil prices. Oil prices are highly volatile. Geopolitical factors represent significant upside potential to oil prices. Two key risks stand tall, Middle East instability and sanctions on Russia for its war on the Ukraine, and Iran. Middle East instability includes disruption in the region’s oil production caused by hostilities as well as Houthi attacks in the Red Sea and the Gulf of Aden. Either of these events could trigger a temporary price shock that could alter these baseline estimates.
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The Sullivan Report delivers subscription-based economic forecasts and market updates tailored to the cement, concrete, construction, and aggregates industries. Its flagship publication, the Cement Outlook, is released three times a year and features 5-year forecast projections, expert analysis, and actionable insights to support informed decision-making and long-term strategic planning amid an evolving economic landscape.
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