Driven by the rising production of light, tight oil centered in North Dakota, Texas, Colorado, and other shale states, U.S. crude output continues to sail to highs not seen in decades, now at about 9 million b/d. The fracking technologies used in the "shale revolution" are seeing efficiency gains of 25% and more per year, helping to reduce break-even costs. Meanwhile, oil demand has been flat or even declining in recent years, particularly since the Great Recession that began in December 2007. But, it must be remembered that the U.S. is still a developing nation; each year we average 3.3 million more people and $300 billion added in GDP. As such, considering that oil is our primary fuel with no significant substitute, U.S. demand, if it doesn't increase, will at least stay buoyantly "very high" at around 19 million b/d. The energy security upgrade has been significant. We now import about 40% of the oil that we consume, down from 66% in 2008. Friends and allies Canada and Mexico now supply about half of our crude imports, and the Persian Gulf supplies less than 10% of the oil that we use. The U.S. is now ~88% self-sufficiency for energy, the highest since 1986.
Rising U.S. Oil Production, Falling Oil Demand
Source: EIA
Rising U.S. oil production has led to higher throughput at refineries. In turn, exports of petroleum liquids have been mounting, refined products like motor gasoline, diesel fuel, and jet fuel. Our exports continue to break records, with about half going to Canada, Mexico, the Netherlands, Brazil, Panama, and Japan. Some crude is shipped to Canada but in small quantities. The real U.S. oil trade deficit has been its lowest since data began to be compiled in 1994 (see here). Last year, the U.S. exported more than $90 billion of petroleum products, versus about $40 billion in 2008. There is now a push to export more crude oil, considering that such a glut has inventories are overflowing. The shale oil boom has created a mismatch for our refineries that are largely based on processing heavier crude. There is an urgency to get our lighter crudes access to competitive global markets. Exporting crude is also a moral obligation: petroleum is projected to remain the world's leading fuel and over 80% of humans live in undeveloped nations. IHS finds that lifting export restrictions on U.S. crude oil, in place since the 1970s, would increase domestic oil production, lower gasoline prices, reduce petroleum imports, and support up to 964,000 additional jobs. Oil investments in new production could reach $750 billion. In fact, U.S. crude oil exports are critical because they support our 2010 National Export Initiative, which didn't meet the goal of doubling exports in five years. U.S. crude exports will limit themselves. If the expected increases in supply don't come to fruition, the market will induce producers to keep the oil here rather than export it. There was an export breakthrough last year when the Department of Commerce reported that extremely light forms of crude such as ultralight condensates could be exported if they meet certain requirements.
U.S. Exports of Petroleum Liquids
Source: EIA
Constituting nearly 50% of use, gasoline is the key to U.S. oil demand. Americans are driving less, but we still have a rising 255 million oil-based vehicles, selling over 16 million new units a year. Graph after graph after graph, U.S. energy demand patterns are clear: demand is typically dependent on personal incomes. That is to say that energy use patterns have still not normalized since the 2007 Great Recession, which caused per capita incomes to uniquely decline. No, gasoline use will not continually increase, but just like oil, demand will at least remain buoyantly "very high" due to a lack of significant substitutes. From 2014-2030, the USDA has real GDP/capita (2010$) increasing to $70,000, up from $51,000 today. CAFE efficiency standards for new cars will hit over 54 mpg by 2025, up from 34 mpg in 2013. This could help reduce incremental oil demand, but probably not as much as some are claiming. Although critical to a modern economy, energy efficiency can actually lead to higher demand by: 1) making fuel cheaper and 2) leading to economic growth for both the overall economy and the individual (“the rebound effect”). From 2013-2040, the U.S. will add a Germany in population (over 80 million) and the light-duty transport sector is expected to increase 35% to 3.6 trillion vehicle miles traveled a year.
The Link Between U.S. Personal Incomes and Gasoline Demand
Sources: EIA; USDA
The revolution in U.S. oil production has been led by North Dakota's Bakken shale play. North Dakota is now producing 1.1 million b/d, compared to 100,000 b/d in 2005. North Dakota is now the 2nd highest oil producing state, double what 3rd place California produces. The oil industries in North Dakota and California are heading in opposite directions. California today imports over 50% of its oil from foreign (non-U.S.) sources, dominated by OPEC and double the percentage in 2000. A complex patchwork of regulations and environmental laws have stunted oil development. Chief Executive Magazine has continually ranked California last (50th) in states for businesses. In contrast, North Dakota has been climbing up the list and now stands 12th. The nation as a whole, however, must encourage California to produce more oil and natural gas. California has over 32 million oil-based vehicles and uses natural gas for a rising 60% of power generation, compared to 47% in 2003. California also imports 33% of its electricity and 90% of its natural gas, which at 2.3 Tcf/year is the largest gas import market in the country.
California's reliance on imported energy is increasingly unfair: the state has higher personal incomes and a history of outbidding for energy. Led by Arizona, Nevada, and Utah, the West is our fastest growing region, and states have their own energy goals. California's Monterey shale formation has complex geology, but huge potential, perhaps as much as 300 billion barrels of oil-in-place. Again, please take downgrades in potential oil reserves especially for shale oil with a grain of salt. Don't be so beholden to numbers that are always in flux. The U.S. Geological Survey, for instance, once concluded that the Bakken had 150 million barrels total. The play, however, is now yielding that amount every four months, and the estimate is that the Bakken could eventually produce over 20 billion barrels. Federal estimates of California's offshore also suggests huge recoverable oil and gas reserves in the federal Outer Continental Shelf, appraised at 10 billion barrels of oil and 16 Tcf of gas. Yet, no new lease sales for exploration in California federal offshore waters are scheduled. At 40,000 b/d, offshore is 7% of the state's oil production.
Be wary of those telling you about the end or the limitations to.....an energy revolution that they never saw coming in the first place.
Crude Oil Production: North Dakota vs. California
Source: EIA
The emergence of North Dakota shows how a surge in oil production can transform an entire state economy, especially since those in the oil patch get paid better than in other sectors. Unlike most places in the world, Americans can own their mineral rights, meaning many have gotten rich off the shale revolution. North Dakota's arrival on the oil production scene has been so rapid that much more infrastructure is required to fully support development. For example, at about 1 million b/d rail outflow capacity is around double that of pipeline. Given the economic potential for shale, and the irreplaceability of oil, pipelines should obviously be a priority because they are the safest and cheapest way to transport oil. Moving liquid fuels by rail can cost around $7-9 per barrel, compared to $1-3, for a 485-mile trip, from Cushing, OK, the delivery point for a NYMEX crude oil futures, to the Gulf Coast, the U.S. refining hub. Adjusted for inflation, North Dakota's economy is now generating close to $60 billion, against $25 billion in 2002.
North Dakota's Rising Personal Incomes
Source: BEA
