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Oil Glut Threatens US Shale Revolution

By Global Risk Insights | Sat, 18 January 2014 00:13 | 1

The year 2014 could pose a milestone for the U.S. oil industry. In its latest annual World Energy Outlook, the International Energy Agency predicted that the U.S. would become the world’s largest producer of oil by 2015, thus surpassing Russia and Saudi Arabia.

Comparably, the U.S. Energy Information Administration estimates that the U.S. will produce 9.6 million barrels of oil per day by 2016. In less than a decade, the shale revolution in the U.S. has reversed a four decade-old trend of increasing oil imports to become a major exporter by the end of this decade.

However, politics might get in the way of this remarkable development. With increased oil supplies coming from the newly discovered shale oil reservoirs, America is overwhelmed with abundant quantities of crude oil without the means to export it due to the 39-year-old-ban on exports of unprocessed oil products outside North America, introduced in the middle of the oil crisis in 1975. Currently, most U.S. shale oil is exported to Canada where it is sold at a higher price.

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Because the U.S. has been the world’s largest importer of oil for decades, American refineries are predominantly fitted to refine the heavy lower-quality crude imported from Mexico, Venezuela and the Middle East rather than the sweet-light domestic crude. As a result, analysts are forecasting that by July 2014, the U.S. refineries will reach their limits to process excessive crude oil.

As the oil glut scenario looms, the pressure is rising on President Obama’s Administration and Congress to allow crude oil exports at the same time as a general debate on this issue is heating up. U.S. shale oil producers are therefore facing a tough dilemma. A continuous increase in oil production, coupled with the lack of political will to relax oil export laws, might bring a significant drop in domestic oil prices and could prove disastrous for the industry, already burdened with very narrow profit margins and fierce competition. Extracting oil from shale is an expensive business, and to be profitable, U.S. shale oil producers need the price of oil to stay above $80 to $90 a barrel.

The supporters of the oil exports ban are claiming that the U.S. is still importing around 40 percent of its oil consumption. Moreover, the key argument for the ban to stay in place is the need to protect the U.S. consumers with lower prices of oil, and the fact that the exports of refined products will bring more benefits for the U.S. oil industry and the economy. This trend is already gaining momentum as U.S. refineries have significantly increased the exports of refined oil products to Europe, South America and Asia.

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In the most likely short-term scenario, U.S. authorities will have to react and ease export control mechanisms to prevent the negative consequences of the oil glut. In the longer term, oil imports will continue to fall as the U.S. oil production increases and U.S. refineries adapt their capacities to distil more domestic oil. With regard to oil prices for U.S. consumers, continuing the export ban will bring limited results, considering the high costs of shale oil production and the complexity of oil price mechanisms in global markets.

Regardless of the outcome, with the shale revolution blooming and energy self-sufficiency looming, the U.S. has a powerful new tool to actively influence global energy markets and retain its global geopolitical status.

Both Congress and the Obama Administration will have to establish the fine line between the need to protect consumers and U.S. strategic interests and efforts to sustain this new trend.

By Ante Batovic

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  • Kunal on January 20 2014 said:
    I think this is the first time OPEC countries and specifically Saudi Arabia has even thought of the terms such as "We welcome the competition." Marhaba all the way is it? Or is it just sarcasm?
    Time will tell.

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