THE U.S. OIL INDUSTRY is pumping at record levels, putting the country on track to surpass Russia as the world’s top oil producer as soon as this year by one recent account from the International Energy Agency.
Booming U.S. production and restraints on oil production abroad have allowed the country’s oil production to surge to the top spot. The shift marks a heady departure from the soaring prices, limited supply and fears of “peak oil” that marked the 1970s, when disruptions sparked by the Arab oil embargo in 1973 and Iranian revolution in 1979 caused prices to soar, or from more recent times, when U.S. production lagged far behind that of top producers such as Russia and Saudi Arabia.
The surge dates to developments in the late 2000s, when advances in hydraulic fracturing, or fracking, and horizontal drilling techniques in the U.S. opened huge reserves of oil – and natural gas – deposited in shale rock formations. U.S. energy producers were suddenly able to access giant supplies of oil that they hadn’t been able to get to before, either due to a lack of technology or because the price was prohibitive.
Oil prices crashed along with global markets in 2008, but as they recovered in the years that followed, the U.S. led two efforts that bumped out a pair of competitors: sanctions against Iran in 2012 in response to that country’s nuclear program, which hampered its oil production and exports; and sanctions against Russian oil executives, banks and energy firms in 2014 in response to the Kremlin’s invasion of Ukraine, restricting Russians’ ability to get capital and equipment for exploration and production.
Together, the actions limited the amount of oil coming onto the market. By that point, however, prices were beginning to waver, and in 2014 began a steep drop that didn’t hit bottom until February 2016. Benchmark prices plummeted from more than $110 a barrel in 2014 to less than $40 a barrel less than two years later.
A chief culprit was a cooling economy in Asia, particularly China, which caused demand for oil to drop. Meanwhile a strong U.S. dollar – the currency used for trading commodities – had made oil more expensive. And U.S. firms were still pumping huge quantities of oil, as were members of the Organization of Petroleum Exporting Countries, or OPEC.
In short, demand dropped, prices were high and supply was soaring.
The drop in prices forced hundreds of U.S. shale oil producers to take their rigs offline – shale oil is more expensive to produce than traditional oil drilling. Eventually, those lower levels of production allowed prices to begin creeping back up, from less than $40 in 2016 to more than $60 this year. OPEC also reached an agreement in 2016 to set production limits, helping further stabilize prices, even as sanctions against Iran were lifted, allowing that country to begin putting more oil back onto markets.
OPEC nations in December agreed to renew the production restrictions, even as U.S. production continues to rise. The prediction from the Energy Information Administration last week that the U.S. would become the world’s top oil producer reignited concerns of a global glut, causing prices to dip.
The International Energy Agency, notably, found that U.S. production alone last year made up for 60 percent of the production cuts under OPEC.
The projection issued last week by the International Energy Association about the future of U.S. output – which included record levels for April – makes official what a range of market analysts and industry experts had increasingly predicted in recent years.
“The No. 1 overall message, non-OPEC supply growth is very, very strong, which could change the parameters for the oil markets in the years to come, led by the United States, but also Brazil, Canada and Norway,” IEA executive director Fatih Birol reportedly told an energy conference in Houston last week.
As much as 60 percent of the 6.4 million barrels of oil expected to be produced in the next five years will come from the U.S., Birol said. U.S. oil exports are also on track to double in the same period.
SOURCE: US News
Compiled and Published by GIB KNIGHT
Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.