Energy experts have been talking recently about an “era of abundance” in oil and natural gas markets. Skyrocketing production – particularly in the United States – has created a state of global oversupply that prompted oil prices to crash in 2014, and contributed to an extended downturn from which the industry is only now beginning to recover.
U.S. oil production ended the year at a record 9.9 million barrels a day in December and the Energy Information Administration (EIA) expects domestic output will continue to climb through 2018. The EIA forecasts U.S. producers will be pumping 10.5 million barrels of oil a day by the fourth quarter of this year based on a conservative West Texas Intermediate (WTI) price of $56 a barrel. Some forecasters are already betting prices will be much higher, though, because a growing middle class in developing countries is keeping demand high even while production sets records.
Now might seem like the perfect time for U.S. producers and policymakers to pat themselves on the back and congratulate themselves on “mission accomplished.” But this is no time for complacency.
History shows that commodity markets are volatile and the recent surge in oil prices – WTI now trades above $60 – has been driven not only by speculative bets by investors but also by an honest-to-goodness tightening in physical oil markets.
Robust oil demand growth should continue – most analysts pegging it near 1.7 million barrels a day this year. But an oversupply can turn into a deficit relatively quickly in oil markets, especially with the Saudi-led OPEC cartel motivated to keep prices high ahead of Riyadh offering to sell a public stake in state oil giant Aramco later this year.
More importantly, the notion that the combination of OPEC and American shale can serve as dual “swing producers” to keep markets well-supplied and prices in check is flawed.
Saudi Arabia has more than 2 million barrels a day in spare production capacity, but the other members of the OPEC cartel have little capacity for increasing their output. Iran and Iraq have vast potential but geopolitical, security and fiscal issues holding back their oil sectors. Other OPEC members like Venezuela, Nigeria and Libya are failed or failing states.
All told, EIA projects OPEC surplus oil production capacity, which averaged 2.1 million barrels a day in 2017, to drop to 1.8 million barrels a day this year, and to 1.3 million barrels a day in 2019. Surplus capacity is typically a strong indicator of market conditions, and surplus capacity lower than 2.5 million barrels a day indicates a relatively tight oil market – and higher prices.
The potential for new oil supplies from the rest of the world to reach the market anytime soon looks just as dubious. Western sanctions on Russia pose a serious threat to that country’s future output. The sanctions target Russia’s Arctic, offshore and shale sectors, which it was banking on for long-term production growth. Kremlin officials say they expect output should remain flat at just under 11 million barrels a day this year.
It’s also important to note how much global investment in oil and gas projects has dried up in the past three years. Worldwide capital expenditures had been running over $700 billion annually in the years preceding the 2014 price crash. Since 2015, investment has been averaged less than $400 billion a year – a level that global upstream capital expenditures are not expected to exceed this year either, owing to continued industry caution and the need to shore up finances. Spending outside North America, particularly in offshore projects, has suffered immensely and been slow to rebound. This spending shortfall will be felt in the coming years when output from deferred or canceled projects doesn’t materialize and has spurred vocal fears of a supply crunch from OPEC members and the International Energy Agency (IEA).
It all adds up to a massive opportunity for U.S. energy policymakers that, if seized, could boost the nation’s economy, reduce its trade deficit and enhance its energy security. The geopolitical benefits are also immense for America’s standing in the world.
U.S. exports of crude oil and refined products are setting new records seemingly every month, with the former reaching 1.73 million barrels a day and the latter 5.43 million barrels a day in October.
China is ramping up its purchases of U.S. crude in an effort to diversify its supplies away from the Middle East and Russia. In October, China took one-quarter of all U.S. crude exports. The U.S. has the potential to become China’s biggest supplier in a matter of years. This would help America reduce its bloated trade deficit with China – which hit $35.4 billion in November alone – and strengthens Washington’s hand with Beijing.
In Europe, Polish state refiner Lotos recently signed the country’s first contract to buy U.S. crude. Warsaw is also looking to diversify its oil and gas imports and escape from under the thumb of its neighbor, Russia. Poland had already inked a deal to buy U.S.-sourced liquefied natural gas (LNG), dealing a blow to Russia’s state-controlled Gazprom. The IEA predicts the U.S. could surpass Qatar and Australia as the world’s largest LNG supplier within a decade, which could further loosen Moscow’s grip over European and Asian markets.
The Trump administration appears to understand the opportunity at hand. It has slashed red tape and regulations on the oil and gas sector and is moving to open new federal areas to leasing and exploration.
Consultancy Rystad Energy reckons the administration’s recent move to open up nearly the entirety of U.S. waters – excepting this week’s decision to drop Florida from the new 5-year plan proposal – could attract billions of dollars of investment and potentially unlock up to 65 billion barrels of oil equivalent of oil and gas reserves.
Perhaps more importantly, the Trump administration is sending a strong signal to the members of OPEC and Russia that America is finally getting serious about maintaining its long-term energy security.
It was America’s vast oil resources that made it into the world’s leading superpower in the 20th century. The economic and geopolitical opportunities of global energy dominance are too great to pass up for America. U.S. energy companies and policymakers simply have to keep their foot on the gas pedal.