How U.S. Oil Matters to Global Markets
Impacting Economics, Geopolitics and Markets
The U.S. is expected to spend about 8.5% of its GDP on energy in 2013. In 2008, when oil prices peaked, it was closing in on 10%. U.S. oil production provides a buffer to supply shocks — which happens frequently in the Middle East and North Africa, two key crude supply regions. In July 2013, disruptions to crude oil and liquids production were nearly 2.7 million barrels per day. Of the supply disruptions, 800,000 barrels were from non-OPEC nations and the other 1.9 million from OPEC, according to the U.S. Energy Information Administration (EIA). August is estimated at a 2.8 million shortfall.
The OPEC-related outages, which include Iran, Iraq, Libya and Nigeria, are considered to be the highest since early 2009. This has contributed to rising prices, from the year’s low of $97 in April to a high nearing $117 August 27th, after Syrian chemical weapons attacks followed on the heels of Egypt’s political turmoil. The causes of the outages in Libya were from labor disputes, while Iraq’s shortfalls originated from pipeline disruptions from violence; Iran’s woes stem partly from sanctions, and Nigerian oil challenges related generally to oil theft and infrastructure sabotage and degradation.
More Data Patterns
Consumption and production patterns have impacted price increases as well. The EIA projects that production in the second quarter of 2013 outpaced consumption, contributing to a global fuel stock build in the quarter versus a draw over the four years earlier. This trend is expected to reverse in the third quarter but will be 55% less than comparable quarters of the last four years. In July and August however, consumption outpaced supply. Overall, world consumption is to increase by 1.1 million barrels per day (bbl/d) in 2013 and 1.2 million bbl/d in 2014, with China owning the lion’s share of consumption growth.
Of the non-OPEC supply disruptions, Canadian, Sudanese, Syrian and Yemeni oil were culprits. Supply disruptions in Syria and Yemen are expected to continue through 2014, the short-term projection period. Overall, in 2013 OPEC supply is expected to decline by 620,000 bbl/d from 2012 production, with the Kingdom cutting back owing to the contributions of non-OPEC supply. Oversupply is not in any producer’s interest as prices at $100 have been able to support the balancing act inherent in supply and tolerated by demand.
Of OPEC producers, heavyweight Saudi Arabia controls the majority of the surplus capacity, which is expected to average 2.3 bbl/d in the second quarter of 2013. The group’s fourth quarter capacity is expected to average 3.6 bbl/d, growing to 4.6 million in 2014. In 2004-2008, the reduced spare capacity of OPEC from a lack of timely capacity investment was a major part of the story when prices rose to around $140, but Asia’s demand growth also contributed to the tight-supply, high-demand picture. The supply-demand dynamics are more favorable than in earlier periods.
U.S. Oil Dominates
The newer capacity additions to the global oil supply chain originate largely from the U.S. Of the expected 1.3 million bbl/d for 2013 and 1.7 million in 2014, North America owns most of it — from U.S. tight oil formations and Canadian oil sands. The top-five states or regions, based on proved oil reserves, are Texas, Gulf of Mexico, Alaska, California, North Dakota and New Mexico. Together, North Dakota and Texas accounted for two-thirds of the net increase in total U.S. proved oil reserves in 2011. Total U.S. proved reserves grew to 29 billion in 2011. (Natural gas reserves grew to roughly 349 trillion cubic feet in 2011.) U.S. total annual oil production is expected to rise by 28% between 2011 and 2014 to nearly 13 million barrels per day. We imported 7.73 million barrels a day in June 2013, a 15% decline over 2012.
Texas had the year-2011 largest increase in oil reserves (1,752 million barrels), driven by horizontal drilling and fracking in tight oil plays, such as the Eagle Ford Shale, the Wolfcamp Shale, and other formations. In 2012, however, Texas produced 583 million barrels, according to Texas Railroad Commission data, about 30% more than in 2011. Barring an economic or political shock, 2013 Texas production looks as if it will surpass 2012 production. Interestingly, producers are squeezing out more oil per well per day — 24% more in 2012 versus 2011. In 2011, development of shale plays in North Dakota’s Williston Basin accounted for most of North Dakota’s addition of 771 million barrels of crude oil and liquids reserves.
Surf the Winds
Though supply fundamentals look promising, price volatility from political turmoil in the Middle East has revealed its influence once again. While the OPEC cartel does influence prices to a large degree, the addition of the U.S. as a non-OPEC de facto incremental producer is new. When oil market prices react, it appears they also settle back down faster in light of fundamentals.
Increased U.S. oil production brings with it gains from supply diversification, and a form of greater energy market stability, if that’s possible. If ever there were a time of ‘great moderation’, a term economists use to describe the period of relative stability of the 1980s and ’90s from economic and monetary policy, the potential that technological advances in energy development brings to energy markets could provide a moderating influence. If policymakers would or could leverage this opportunity, they have the chance to help balance today’s energy needs with tomorrow’s ideal energy portfolio before peak resources arguments rise up again. America’s private sector is definitely riding these tailwinds at a time when good news on economic and security fronts is welcome.
2015 EIA Energy Conference
June 15-16, 2015 - Washington, D.C.
Platts North American Crude Oil Summit
February 26-27, 2015 - Houston, TX