Can we talk about oil? Tom Friedman now evinces excitement about his discovery of the emergence of America as “a major oil and gas producer.” (See his Sunday New York Times column.) No kidding. He was, he says, tantalized by a tongue-in-cheek idea; the U.S. could join OPEC.
Some folks are late to the party. The U.S., a land of hydrocarbon abundance, has been for ages the world’s third largest oil producer, right behind only Russia and Saudi Arabia. The U.S. literally created the oil industry, and American oil & gas companies continue their utter global dominance in technologies and skills — despite our steady decline from domestic peak production in November, 1970.
Friedman’s embrace of a new oil & gas paradigm was sparked by the recent reversal in U.S. production decline, and a collateral drop in U.S. imports. Both stories are big news of late, and even embraced now by President Obama … subsequently igniting fierce debate about who gets credit. (Of course Friedman calls for “higher environmental standards” for domestic drilling, etc. Okay. S.O.P., and besides the point.)
Friedman attributes the change in America’s oil fortunes to, in this order: biofuels (ethanol), vehicle fleet efficiency, and then he writes, almost as an afterthought, “add to that … the increase in oil production from offshore fields and unconventional sources in America.”
It is instructive to put these factors in the order in which the data tell us they made a difference. Instructive because of what it says about the future. The order of impacts: recession, onshore oil fracking, and ethanol. Nearly the entire story is accounted for, in that order, from those three factors.
First, the biggest single factor, at least insofar as import dependence is concerned, has been the Great Recession. Oil demand is down about 2 million barrels per day (mmbd) since the peak of a half dozen years ago.
The second biggest factor was on the oil supply side – America increased output by about 1 million barrels per day over the last half dozen years largely from onshoreproduction on private, not federal, lands via the technology called fracking. Meanwhile, over this period, offshore production has only recently started to recover from the decline following the federal response to the 2010 Deep Water Horizon disaster.
The third factor was ethanol, adding some 0.5 mmbd of supply over the past half-dozen years. Friedman gives credit to Bush 43’s policies. What he doesn’t note is that America has pretty much maxed out what it can do with corn-alcohol. TheEnergy Information Administration calls this the “ethanol blend wall.” In theory, one could eventually convert the entire American vehicle fleet and fuel infrastructure so that it can handle higher (even 100%) ethanol blends. But for now for technical and safety reasons, we’re essentially at the limit.
Since U.S. imports have dropped about 2 mmbd, if you’re following the math here, you would note an imbalance. We haven’t mentioned (nor did Friedman) that U.S. exports, yes exports, of oil have grown by 2 mmbd over the past half dozen years (whacking billions off the balance of trade deficit). In short – oil demand down (recession), oil production up (technology), oil exports up (ditto).
The fuel efficiency factor is nearly irrelevant here. There has not been enough time over this handful of years for the national fleet to turn over and thus materially impact average vehicle efficiency. In fact, because of the Great Recession many consumers have put off buying new, thus more efficient cars, slowing fleet turnover. The one thing that did change is that people drove less, and bought less stuff, the latter leading to less commercial vehicle fuel use — not a nice recipe for fuel savings. Motor gasoline demand is down slightly, about 0.3 mmbd, compared to pre-recession.
Using the past as a barometer to predict a possible future – and assuming decent economic growth will return – one can easily itemize which of these aforementioned factors will, going forward, make a significant near-term difference in oil, impacting whoever is President 2013-2017.
We will likely see some modest gains in average vehicle fleet efficiency somewhat offsetting the return to economically normal driving — not because of new standards but because of pent-up demand to finally buy new cars. New cars are historically more efficient – a fact that predates CAFE rules by decades. And likely there’s a bit of squeeze room left from ethanol, but not much and nothing close to the past half decade.
How about electric cars? Fuh-get-about-it. Even achieving the optimists’ one-million-vehicle goal in the near future, wouldn’t take 0.05 mmbd off the road. Ditto putting natural gas in one million vehicles by then too. Taken together these two factors barely break 0.1 mmbd – one-tenth the gains made from fracking.
So, bottom line, considering all the data outlined above, there are just two big factors to help policy makers with a near-term impact on further decreasing U.S. strategic and economic oil dependence, and where investors can make a collateral bet — think for example; Baker Hughes [NYSE:BHI] and Schlumberger [NYSE:SLB], or Key Energy Services [NYSE:KEG] and Triangle Petroleum [AMEX:TPLM]:
- Producing more on-shore oil,
- Producing more off-shore oil.
That’s it. Seems like it’s hard to avoid drill baby drill.