(Robert Campbell is a Reuters market analyst. The views
expressed are his own.)
By Robert Campbell
NEW YORK Nov 13 So the United States is going
to become a bigger oil producer than Saudi Arabia, according to
the International Energy Agency.
At first glance, this is vindication, both for America's
hyper-entrepreneurial energy sector, and, paradoxically, for its
infamously incoherent energy policies.
The IEA's news was greeted by a predictable chorus of
bullish headlines suggesting major benefits lie ahead.
The new forecast sees the United States lifting oil output
(a term that includes natural gas liquids) to 11.1 million
barrels per day by 2020, some 500,000 bpd more than Saudi
That is enough to cut net oil imports to less than 6 million
bpd by that year, less than half the level of 2005.
Less spending on oil imports could supercharge the economy.
Perhaps even the holy grail of a return to the time of
cheap(ish) gasoline is at hand.
But a closer look at the IEA's forecast reveals awkward
truths for all sides of the United States' energy policy debate.
First, conservation accounts for more of the reduction in
the oil import requirement than new drilling. Although the IEA
sees U.S. oil production slowly declining from 2020, it expects
conservation policies to have a dramatic impact from that point.
America's net oil import requirement falls below 4 million
bpd by 2035, according to the IEA forecast, even as oil output
declines 1.9 million bpd from the 2020 peak.
A VOTE FOR CONSERVATION
The conservation part of the scenario looks likely to come
to pass. Last week's presidential election was a defeat for
America's oil industry, which spent heavily and openly in its
vain attempt to unseat President Barack Obama.
The majority of voters, particularly in key "swing states"
ignored calls to "vote4energy" or to end the "war on coal."
Similarly, predictions that Obama's rejection of the
Keystone XL pipeline would prove to be his Waterloo were equally
unfounded. Nor did challenger Mitt Romney win votes by saying he
would roll back Obama's tighter fuel efficiency standards for
Voters either wanted Obama's energy policies or did not care
enough about them to get rid of him. Either way, his
conservation measures will stay in place and may well be
However the supply side of the IEA's equation may be harder
to square. After loudly backing the president's opponent in the
election, the oil industry now needs Obama's support to actually
achieve the promised production growth.
The industry's problem is that much of the new "oil" is, for
lack of a better word, the "wrong" kind of oil.
A third of the projected 3 million bpd increase in
production by 2020 will be in the form of natural gas liquids,
such as propane and ethane.
That's a problem because the United States is already
self-sufficient in NGLs. Already, domestic NGL prices have
crashed as infrastructure bottlenecks and limited incremental
demand put buyers in the driver's seat.
Although plans are afoot to expand petrochemical facilities
to absorb some of this new supply, exports will be needed to
balance the equation as large-scale conversion of NGLs to
transport fuels would require enormous investments.
Fortunately for the energy industry, NGLs can be legally
exported with few restrictions. At least in this case, the
United States will be able to exchange volumes of "oil" with the
global market to optimally meet its own needs.
But those rules do not apply to crude oil.
Burgeoning light crude supplies are unfortunately mismatched
when it comes to the United States' most efficient refineries,
which are set up to process heavy crude.
Under some circumstances, that is not such a big problem.
Units can be modified or mothballed to run lighter barrels,
particularly when prices are highly favorable.
But when the domestic market looks set to shrink
dramatically, refiners will be very reluctant to invest in any
capacity that does not offer a very quick payback.
BRUTAL SHAKEOUT LOOMS
Plunging oil demand due to conservation augurs another round
of blood-letting in the U.S. refining sector.
The IEA expects U.S. oil demand in 2020 at only 16.6 million
bpd, down 2 million bpd from today's levels.
And the shirking accelerates after 2020. Only five years
later, the market slides to 15.4 million bpd. By 2035, oil
demand is a mere 12.6 million bpd.
But already the United States is a net oil product exporter.
Slumping domestic demand will further force its refineries into
the export market or to shut down.
Closures are more likely as refining capacity worldwide is
on the rise, with many countries pursuing aggressive efforts to
limit their reliance on imported refined products.
These facts mean two things.
First, American consumers are unlikely to ever see a
prolonged period of decoupling between U.S. fuel prices and
global fuel prices since surplus gasoline and diesel will be
Second, bans on U.S. crude exports risk bouts of oil price
crashes as inland refineries shut down as casualties of the
shrinking domestic market and their inherent lack of
competitiveness in coastal export markets.
Repeated oil gluts are likely to undermine investors'
willingness to fund the expansion of oil production to the
degree envisaged by the IEA.
A simple solution beckons: unrestricted crude oil exports.
This would protect the domestic upstream sector from disruptive
price crashes while not affecting consumers, who would already
be paying world prices for fuel anyway.
Ignorance pervades thinking on this issue, however. Many
politicians and voters see export bans as the solution to high
Here the energy industry could play a role, educating the
public on the implications that America's energy conservation
policy has for oil production.
But now the risk lies in the possibility that the industry's
intransigence in the election has alienated enough politicians
that they will block oil exports for years to come, even as the
refinery shakeout ensues.
The United States, like many other countries, is about to
learn that geology is only a necessary, but not sufficient,
condition of being an oil superpower.
(Editing by Lisa Von Ahn)