According to the “World Energy Outlook 2012,” report recently released by the International Energy Agency, the U.S. will overtake Saudi Arabia as the largest global oil producer by 2020, and become a net oil exporter by 2030. The report also predicts that by 2015 the U.S. will surpass Russia as the biggest producer of natural gas. These predicted shifts are driven by the recent increases in U.S. oil and gas production, which were spurred by upstream technology developments like hydraulic fracturing.
Fatih Birol, chief economist at IEA, told New York Times, “the agency’s prediction of increasing American self-sufficiency was 55 percent a reflection of more oil production and 45 percent a reflection of improving energy efficiency in the United States, primarily from the Obama administration’s new fuel economy standards for cars.”
What barriers stand in the way of the U.S. achieving this energy market position? What are the costs and benefits of the US becoming a net energy exporter?
IEA and Saudi America: Nothing is so firmly believed as what we don’t know
The Wall Street Journal front page story quoting from the recent International Energy Agency (IEA) report, indicated that the U.S., within less than a decade, will surpass Saudi’s and Russia’s oil production and become the number one producer of oil in the world. Wow (DoRight still says wow!). According to DoRight and the Wall Street Journal, if this occurs, America could reduce its dependency on imported oil and, at least from an oil perspective, no longer fear tension in the Middle East. In this new world of oil abundance, U.S. production would surge to 11.1 billion barrels a day by 2020, assumedly including liquids. Within a decade, the IEA forecasts that U.S. oil imports will fall by more than half, to just 4 million barrels a day. Reduced imports would result from increased U.S. production and falling demand. Natural gas in the Journal’s hyperbolic description would displace oil as the largest single fuel mix by 2030. (It should be noted that the Journal’s editorial praising the implications of “Saudi America” suggested more than a doubling of U.S production within the next ten years, much more than projected by the IEA and described in its own front-page story. Real editorial independence! Or someone didn’t check.)
Not so fast!. The L.A. Times ran a story headlined “U.S. fuel exports grow to historic levels,” and explained that “increased fuel exporting by U.S. refiners is one of the reasons that gasoline and diesel prices have been so high.” Refiners, responding to criticism, indicated that exports are essential to make a buck…translated secure profits.
Refinery owners are not anti-American. But they are the antithesis to Bruce Springsteen’s creed, “We take care of our own,” unless it means their own profits. Oil and its derivative gasoline are traded in a global market. Higher prices (and profits), not patriotism, are sought by refineries. The conventional idea that U.S. surpluses will significantly affect gasoline prices does not really apply when there is global demand for U.S. oil and gasoline, as well as higher prices outside the U.S.
IEA’s projections frequently have been wrong. I believe they are wrong now. Increasing costs of drilling for tight oil and uncertainties concerning price of oil per barrel will lead to caution on the part of oil companies with respect to new wells. Recently, oil prices per barrel have hovered around $85 a barrel. But they have fluctuated between $70 and $110 a barrel. At $60 a barrel, oil production becomes a real risky business. Because the cost-profit equation doesn’t pan out, at $50, oil companies likely will shut down drilling.
Environmental and GHG regulations will be an impediment to extended drilling, particularly in fragile environmental areas. Demand for oil will be governed, to a large degree, by global economic health. If vigorous growth returns, there will be a much wider gap between demand for and supply of oil than described by IEA. In this context, IEA’s demand curve seems screwy. It illustrates demand increasing significantly through a good part of the next decade, then declining relatively rapidly. Their rationale reflects at best a tenuous generalization and at worst a wish. Assuming, the U.S. lived in a bubble, the deficit between U.S. oil production and U.S. demand will remain significant well into the next decade.
We now secure about 10 percent of the oil we import from the Middle East. Increased production in the U.S. will reduce the amount of imports probably to less than 5 percent. Yet the costs for gasoline in the U.S. will continue remain impacted by Middle East tensions. Nations requiring oil imports like China and Japan rely more than the U.S. on Middle East oil. If tensions erupt into conflict, they will compete vigorously for remaining oil and as a result, bid up the global price and consumer costs for gasoline in the U.S.
To some extent, trading in oil is like playing poker. If oil companies guess right they make lots of money; it they guess wrong, they still make lots of money by transferring costs to the consumer. Their ability to control prices and the market for transportation fuel gives them all the cards they need to become sustained winners. Consumers and the economy are losers.T
The transportation fuel market is a restricted market with consumers limited primarily to a choice among blends of gasoline. “Why does the federal government limit other safer, more environmentally friendly, and cheaper fuels from competing with gasoline?” Present outmoded anarchistic statutes and regulations impede the use of alternate replacement fuels such as natural gas, ethanol and methanol. Their ability to compete with gasoline would lower the price of oil per barrel and the cost of gasoline at the pump, the frequency of oil and gas spikes and significantly. If you’re an environmentalist, the incentives for oil companies to drill for tight oil in environmentally sensitive high cost drilling areas like the Arctic Circle. Marshall Kaplan, Marshall.Kaplan@Fuelfreedom.org
Once again, Marshall, you da Man!. “Oil and its derivative gasoline are traded in a global market.” Thankfully, natural gas is not and won’t become so for North America unless we export more than the surplus. It’s estimated that Alberta and British Columbia have even more shale gas that is to be found in the Lower 48. Merely producing more oil/oil products is not going to insulate us from global price volatility. Continuing the shift toward lower carbon natural gas for power generation and, later, transportation fuels made from coal plus NG and from alcohols will insulate us.
Of course it’s foolish to bet it all on one fuel source. We need to fund continuing research into alternatives and think of NG as a bridging mechanism to get us away from if not entirely off that global crude oil price roller coaster. That positive outcome demands we NOT become the world’s biggest natural gas exporter.
I agree that the IEA report claiming huge future growth in US oil production is not to be believed. I wrote a post describing some of the issues I see: IEA Forecast Unrealistically High, Misses Diminishing Returns.
A major problem is that oil companies extract the oil that is easiest (and cheapest) to extract first. We have now reached the place in the extraction cycle where extracting an increasing amount of oil is progressively more expensive, because of diminishing returns–we need to dig deeper, or work in more inhospitable locations or use steam to melt out oil because it is too viscous. The IEA model does not provide for a sufficiently high oil price that would cover the rising extraction cost.
The problem if a person assumes a high enough oil price is that the US economy cannot withstand the high prices required to profitably extract the fuel. The high oil price will tend to put the US economy into serious recession, because of more complex relationships that are commonly modeled. For example, high oil prices indirectly affect demand for homes, and thus their prices, and lead to defaults on debt, leading to a need to bail out banks. I have written on this as well. See my article in the journal Energy, Oil Supply LImits and the Continuing Financial Crisis.
I read a Deutche Bank Market Reearch report that seems to agree with my assessment of the IEA World Energy Outlook. It says,
Great posts thus far.
Unfortunately, this kind of ‘analysis’ seems bound to continue. . .