U.S. Energy Production: Game Changer
We have all heard about the rise in U.S. energy production. Most of it is related to extracting natural gas from the country’s vast shale deposits, as well as new drilling techniques, such as horizontal drilling, which have suddenly increased the longevity of older oil fields. I thought it would be interesting to look at the actual figures, and reasonable estimates regarding future production.
Imported Energy Dependence
There is no doubt; the U.S. isundergoing a dramatic reversal of its energy fortunes. By any measure, U.S. dependence on imported energy is declining rapidly. According to the Energy Department (USED), foreign imports accounted for 30% of total U.S. consumption in 2005. By 2011, that figure had fallen to 19%. The agency forecasts that it will decline steadily through its 2040 forecasting period, reaching 9% in 2040. A little more optimistic forecast comes from the International Energy Agency (IEA).According to the IEA, the U.S. will bea negligible net importer of energy by2035.
The Rise of Tight Oil
Oil production is rising rapidly as a result of tight oil, or oil drilled using non-traditional techniques. The USED put U.S. oil production in 2012 at 6.4 million bpd, rising to a forecasted 7.3 million bpd in 2013, with a further increase to 7.9 million bpd forecast for 2014. The IEA forecasts U.S. oil production will reach 11.1 million bpd in 2020, and remain at a high 10.9 million bpd through 2025. The IEA forecasts are considerably higher than USED forecasts for that same time period, but since these statistics are constantly being revised, it’s anyone’s guess what the actual number will be.
US to Overtake Saudi Arabia
The IEA forecasts are responsible for
press reports that the U.S. will be the world’s largest oil producer in about 5 years, surpassing Saudi Arabia by a small amount for at least the following 15 years. In fact, I found a number
of press reports that refer to U.S. oil producers as the “blue-eyed sheiks”.
Geopolitical Game changer
No matter which estimate you prefer, either one is a geopolitical game changer. The U.S. is already independent from Middle East oil. A problem in the Middle East would certainly affect U.S. oil prices, but the U.S. no longer needs to worry about security of supply as it did during the 1973 Arab Oil Embargo. East Asia is now the region most vulnerable to political developments in the Middle East.
Natural gas production in the U.S.
is having an even more significant economic effect than the increase in oil output. According to the more conservative USED, the U.S. will become a net LNG exporter by 2016, and an overall net exporter of natural gas by 2020. The main importer will be Mexico, which is expected to quadruple imports of natural gas from the U.S. It is ironic that Mexico, once one of the
world’s leading net energy exporters will become increasingly dependent on the US for its energy needs.
The Rust Belt
Given that much of U.S. natural gas is being produced in the Midwest, and lacking any infrastructure to export it, much of it will be used to supply local manufacturing activities in the traditional rust belt. Logistics will keep U.S. domestic natural gas price much lower than world prices for years to come. This is already providing a big boost to U.S. industrial competitiveness.
Another change is that US energy intensity, or the economy’s overall dependence on energy, continues to fall. Between 1990 and 2011, energy required per dollar of output declined by an annual average of 1.7%. It is expected to continue declining.
One important energy savings is coming from increased motor vehicle fuel efficiency. The USED’s measure of on-the-road estimates of mpg for new
cars and light trucks rises from 21.2 mpg in 2012 to 36.1 mpg by 2040. This means that new cars will have a sticker mpg of 56.1 in 2040, with light trucks at 40.4 mpg.
Another development is that since natural gas emits less CO2 than coal or
oil, the move to natural gas is helping keep down CO2 growth. Between 2005-2040, for each dollar of output, CO2 emissions are expected to decline by 2.3% per year. CO2 will still be
rising, but at a slower rate. Vincent J. Truglia has more than 34 years experience as an economist. At present, he is a Principal and Managing Director of Global Economic Research and Managing
Director of Global Research at Granite Springs Asset Management, LLC.
Vincent J. Truglia has more than 34 years experience as an economist. At present, heis a Principal and Managing Director of Global Economic Research and Managing Director of Global Research at Granite Springs Asset Management, LLC. Vincent also headed the Sovereign Risk Unit at Moody’s Investor Service for a number of years.