Wednesday, August 06, 2014

The Missing Oil Crisis of 2014

  • While the full impact of the surge in US "tight oil" may be masked by problems elsewhere, it is on the same scale--but opposite direction--as key factors that led to the 2007-8 oil price spike.
  • In that light it does not seem like hyperbole to credit the recent revival of US oil output with averting another global oil crisis.
Several speakers at last month's annual EIA Energy Conference in Washington, DC reminded the audience that energy security extends beyond oil, starting with Maria van der Hoeven, Executive Director of the International Energy Agency (IEA). In her keynote remarks Monday morning she was quick to point out that it also encompasses electricity, sustainability, and energy's effects on the climate and vice versa. Still, the comment that got my wheels turning came from Dan Yergin, author and Vice Chairman of IHS. During his lunch keynote he suggested that without US tight oil production, this year's conference would have been dominated by another oil crisis.

Although shale energy development certainly deserves to be called revolutionary, crediting it with averting an oil crisis calls for a bit of "show me." Yet with problems in Libya, Nigeria and Iraq, while Iranian oil remains under sanctions and oil demand picks up again, even at first glance Mr. Yergin's assertion looks like more than a casual, lunch-speech sound-bite.

Start with current US tight oil (LTO) production of over 3 million barrels per day (MBD) and estimates of future LTO production rising to as much as 8 MBD--also the subject of much discussion at the conference. As recently as 2008 total US crude oil output had fallen to just 5 MBD and was only expected to recover to around 6 MBD by 2014, with minimal contribution from unconventional oil. Instead, the US is on track to beat 2013's 22-year record of 7.4 MBD, perhaps by as much as another million bbl/day.

With conventional production in Alaska and California declining or at best flat, and with Gulf of Mexico output just starting to recover from the post-Deepwater Horizon drilling moratorium and subsequent "permitorium", the net increase in US crude production attributable to LTO today is in the range of 2.5-3.5 MBD and growing, thanks to soaring output in North Dakota, Texas and other states.

That might not sound like much in a global oil market of over 90 MBD, but it brackets the IEA's latest estimate of OPEC's effective unused production capacity of 3.3 MBD. Spare capacity and changes in inventory are key measures of how much slack the oil market has at any time. When OPEC spare capacity fell below 2 MBD in 2007-8, oil prices rose sharply from around $70 per barrel to their all-time nominal high of $145 per barrel. It took a global recession and financial crisis to extinguish that price spike, and high oil prices were likely a major contributor to the recession.

Global oil inventories are now a little below their seasonal average for this time of the year. Compensating for the absence of over 3 MBD of US tight oil would require higher production elsewhere, lower demand, or a drain on those inventories that would by itself push prices steadily higher.

Concerning production, if the US tight oil boom hadn't happened, more investment might have flowed to other exploration and production opportunities. However, for non-LTO production to have grown by an extra 3 MBD, companies would have had to invest--starting in the middle of the last decade--in the projects necessary to deliver that oil now. Were that many deepwater and conventional onshore projects deferred or canceled because companies anticipated today's level of LTO production more than 5 years ago? And would Iraq, Libya and Nigeria be more reliable suppliers today if US companies hadn't been drilling thousands of wells in shale formations for the last several years? Both propositions seem doubtful.

As for adjustments in demand, US petroleum consumption is  already over 8% less than in 2007. And as we learned in the run-up to 2008, much of the oil demand in the developing world, where it has grown fastest, is less sensitive to changes in oil prices than demand in developed countries, due to high levels of consumer petroleum subsidies in the former. Petroleum product prices in the latter must increase significantly in order to get consumers there to cut their usage by enough to balance tight global supplies. That dynamic played an important role in oil prices coming very close to $150 per barrel six years ago, when average retail unleaded regular in the US peaked at $4.11 per gallon, equivalent to nearly $4.50 per gallon today.

So to summarize, if the US tight oil boom hadn't happened, it's unlikely that other non-OPEC production would have increased by a similar amount in the meantime, or that OPEC would have the capability or inclination to make up the resulting shortfall versus current demand out of its spare capacity. Demand would have had to adjust lower, and that only happens when oil and product prices rise significantly. With oil already at $100 per barrel, it's not hard to imagine such a scenario adding at least $40 to oil prices--just over half the 2007-8 spike. Combined with higher net oil imports, that would have expanded this year's US trade deficit by around $230 billion. US gasoline prices today would average near $4.60 per gallon, instead of $3.54, taking an extra $140 billion a year out of consumers' pockets.

We can never be certain about what would have happened without the current surge in US tight oil, but for a reminder of how a similar situation was characterized just a few years ago, please Google "2008 oil crisis".  If we found ourselves in similar circumstances today, then the heated Congressional hearings and angry consumers to which Mr. Yergin alluded in his remarks would almost certainly have been major topics at EIA's 2014 conference, instead of the realistic prospect of legalized US oil exports.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.


tooldtocare said...

The end of the Fossil Fuel era is upon us so what are we going to do next-?

Energy information Administration Official Energy Statistics from the US government

The above report indicates that the US will be using primarily oil as our main energy source through 2030.

The world's total declared reserves are 1,317,400,000,000 barrels (January 2007).

World oil consumption 2005 is 80,290,000 barrels per day or 29,305,850,000 per year

Dividing annual consumption into total reserves gives us 44.9 years of oil supply at the current consumption rate.

That was eleven (11)years ago, we are not changing your habits and this spells doom for us all.

Do you have any suggestions--?

Anonymous said...

Other financial products use net values for their forecasts - net profit, net income, but when it comes to the IEA EIA net energy is ignored. Why is that ? What are they trying to hide ?

Geoffrey Styles said...

I'm afraid those stats are too old to come up with a meaningful R/P or reserves over production figure, particularly with shale technology having changed the potential resources significantly. Oil will run out (as in become uneconomical compared to alternatives) at some point, but most indications today suggest that that won't happen before other technologies have matured enough to take over oil's various roles without a huge disruption. This will be a long transition, but it has already started.