By Alan Levine
America’s growing energy independence is impacting global markets in ways not generally anticipated when North American crude oil production bottomed in 2008.
Higher crude oil levels have given American oil merchants assurance of a more secure source of product supply. They have also translated into lower prices and expanded profit margins on many products. And, since the laws of supply and demand have not been overturned, lower price has encouraged demand.
More broadly, North American energy independence has lowered imports and helped reduce our balance of trade. Moreover, the competitive balance between natural gas and oil has improved.
Another important change has been the realization that having so much crude oil available provides the United States with a big voice in international supply affairs. This country has long been the focus of petroleum consumption policies. Matters of production have more typically been directed to OPEC and its policies. Today, the United States and Russia figure importantly into world supply/demand balances.
Crude oil production was on the wane when output reached 5 million barrels daily in 2008. This was roughly the same as experienced in 1949. Most recently, crude oil production has reached 9 million barrels per day.
The United States relied heavily on imports of crude oil and products to meet its needs in 2008. Crude oil imports approached 13 million barrels daily in that year. This was more than 80% of crude oil run in refineries. Energy independence has sharply reduced this country’s reliance on foreign sources. Imports of crude oil are now running around 6.9 million barrels daily, less than 47% of runs.
The United States, along with Canada, is now contesting for global production leadership. Since mid-2014, the combined oil production of the United States and Canada rose nearly one million barrels daily to a record 12.7mbd, well exceeding that of both Saudi Arabia (9.6 million barrels per day) and Russia (10.6 million barrels daily.)
The United States carries a lot of weight when thinking about controlling the supply of crude oil. Russia is contributing more than ten million barrels per day to global crude oil supply. Together they have much to say about where price might be going. As their power grows, that of OPEC wanes.
International uncertainties abound. There are always possibilities for supply curtailment during which OPEC crude oil could become more important. Barring such situations, the availability of North American crude oil has shifted the locus of pricing and supply for a long time to come.
Much is being made of the Saudi initiative to maintain production at the expense of price. Some analysts see this as an attack on new shale based production in the United States. Others point out that different motives may be at play, including an attempt to inflict economic damage on Iran, a challenger for primacy in the Persian Gulf region. Many observers do not believe that an agreement by OPEC members to reduce production in support of price is likely to occur.
If there is no consensus and non-OPEC North America and Russia stand ready to supply, the value and even viability of OPEC must be questioned. A little more than forty years ago, OPEC initiated an embargo with long lasting impact on the United States. That event explains today’s barriers to export of crude oil. It also signaled wresting of control of production from the international major oil companies.
Subsequently, OPEC set production quotas intended to support price. With some notable exceptions, this system has remained in place. But the world has changed. Unrest in the Middle East and North Africa became the Arab Spring.
To appease restive populations, many MENA governments spent heavily on social programs. These came at a price. The IMF, for example, estimates that the United Arab Emirates’ budget requires a crude oil price of $80 to balance. In 2008, the comparable number was around $25.
As crude oil prices have softened, other OPEC nations have expressed concern. Venezuela, which needs around $100 per barrel to balance its budget, has expressed interest in collective reduction of output among OPEC members. Saudi Arabia has been disinclined to agree.
The newest factor impacting OPEC’s ability to control price is production growth in North America and Russia. Analysts expect the United States to pass both Saudi Arabia and Russia to become the largest oil producer in the world.
Compounding the problem, global demand has been wavering. Moreover, Japan’s use of natural gas is growing. Assaults from alternative fuels are sure to impact OPEC’s ability to set the agenda for crude oil production in the years ahead.
There are other ramifications for international affairs flowing from OPEC’s loss of control over output. Independence is a powerful weapon in the hands of the United States. It allows the country to take a more balanced stance in international affairs, less beholden to supplier nations.
Alan H. Levine is CEO of Powerhouse, a company offering the Power of Price Protection. Alan has served the energy industries since 1969 and focused on hedging and price risk management since 1977. He can be reached at [email protected] and (202) 333-5380.
