It’s not entirely a serious proposition — yet.
But the point is the global market for hydrocarbons is undergoing a fundamental change, and whether you are a major energy consumer or not, the impact will be felt throughout the manufacturing landscape.
In the short term, it is difficult to see how prices can go any way but up. As the Economist Intelligence Unit wrote last week, the price for dated Brent Blend averaged US $125.50 per barrel in March, up from US $119.70 per barrel in February and just US$107.90 per barrel in December 2011.
These price movements were driven in large part by fears of supply, particularly supply disruption due to the standoff with Iran, but also because of an accumulation of small disruptions in Africa, the Middle East and the North Sea. Output from Syria and Yemen has fallen as a result of civil unrest in these countries, and the pipeline carrying 260,000 barrels per day of South Sudanese oil has closed as a result of tensions between Sudan and South Sudan.
Production in the North Sea has been weak, and the EIU reports that exports from Iraq’s Kurdistan region (which account for about 75,000 barrels per day) have halted. In themselves, these disruptions amount to only about 1 million barrels per day, but they largely negate the increased output delivered by Saudi Arabia intended to calm fears of insufficient supply.
Nevertheless, the EIU estimates the market is likely to be in surplus this year and, providing negotiations with Iran proceed if not satisfactorily then at least without drama, oil prices should soften in the second half as weak demand meets ever-rising inventory levels.
We wrote last month about the rise in shale gas supplies and the possible consequences for US manufacturers able to access globally competitive energy supplies for the first time in decades. However, a number of articles have recently come out from academics and economists exploring the longer-term implications of not just shale gas, but also rising shale oil, tar sands and deepwater oil supplies on the North American market.
Not surprisingly, views vary widely as to whether oil prices could possibly follow natural gas and fall substantially from current levels. The concept of peak oil seems so deeply entrenched that not just investors, but many corporations have formulated their long-term strategy on a one-way bet for energy prices. But a few brave souls are suggesting we are in the very early stages of a new trend that could have profound implications over the next twenty years.
Nick Butler, visiting professor and chair of King’s Policy Institute at King’s College London, a leading British university, recently wrote in the FT suggesting the rise in production of shale oil and natural gas — not just in the US but also China and Europe — combined with falling demand due to more economical cars is heralding the onset of a long-term decline in global energy prices that could have profound effects both economically but also politically in the years ahead.
The NY Times agrees, quoting Rex W. Tillerson, the chairman and chief executive of Exxon Mobil at a recent conference where he said, “The transformation unfolding in North America represents a potentially decisive shift in the history of energy.” The article explores the potential for North America to be self-sufficient in hydrocarbons by 2020.
Natural gas prices have led the way falling from a high of $14 per thousand cubic feet a few years ago, to just $2 per thousand cubic feet today, with less than one-seventh the price of LNG cargoes selling in Asia. Cheniere Energy’s $10 billion Sabine Pass LNG plant project in Louisiana, which has just been given approval to export LNG, is likely to be the first of several such plants turning the US into a natural gas player on the world stage with profound implications.
Where shale gas has led, shale oil is following. Shale basins across the country, like the Bakken field in North Dakota, Eagle Ford and Barnett in Texas, and the Marcellus in the Northeast, hold tremendous oil and gas reserves. Only in recent years has this become accessible, with production from the Bakken region alone rising from negligible quantities to 500,000 barrels of oil a day in just a few years.
Production at Eagle Ford was just 787 barrels in 2004, but last year production reached 30.5 million barrels, according to state regulators, and it is still growing. Natural gas production there went from nothing to 243 billion cubic feet in just three years. Estimates obviously vary as to how far and how fast this can grow.
The National Petroleum Council in a study last year gave a low estimate of 10 million barrels a day by 2035 and a high of 20 million barrels per day, but some experts are even more bullish. Citigroup forecast that North American oil production could reach 27 million barrels per day by 2020, almost twice the rate of production of 15 million barrels per day at the end of 2011. Production from the United States could grow to 15.6 million barrels per day by 2020, up from 9 million barrels per day in 2011.
If that proves correct, the growth in oil and natural gas supplies in the next decades could turn the United States into a top energy exporter, rivalling some members of OPEC. Natural gas is already lining up to become a significant export as LNG. Refined petroleum products, and even crude oil, could find customers in Europe and Latin America.
With less gasoline demand as autos become more economical and with owners driving fewer miles (average distance travelled peaked in 2003 at 12,300 miles and could fall to 11,600 by 2020, according to Citigroup), the nation’s surplus refining capacity means the United States is set to expand on the export of petroleum products — like gasoline and diesel. The United States is already the top exporter of refined products, just ahead of Russia.
Imports of crude oil hit a peak in 2005 when the US imported 21 million barrels per day, since then it has fallen by about 3 million barrels per day, due to efficiency gains and the recession. With CAFE standards targeted to achieve 54.5 miles per gallon by 2025, that trend is unlikely to be reversed and indeed should continue.
For the US to become self-sufficient in energy would have significant benefits on a number of levels. The balance of payment would be significantly improved as the US gradually spent less money buying oil from Canada, Nigeria, Venezuela, Mexico and Saudi Arabia – its current top five suppliers.
It may not necessarily lead to a collapse in global oil prices, as demand is likely to continue to rise in emerging markets, gradually replacing US consumption from the world market, but dramatically lower natural gas prices are already helping US industries (e.g. chemicals, fertilizers, metals and ceramics) to the extent that many firms who have moved production offshore five to 10 years ago must be reviewing whether they should bring such production capacity home.
Indeed, Citigroup estimates that the transformation in the energy supply market could result in 3.6 million new jobs, a reduction in the trade deficit of 60 percent and an appreciation of the dollar by 5.4 percent as imports shrink.
Not everyone is welcoming the potential changes, though. For as much as replacing electricity production from coal by natural gas is an improvement in emissions, environmentalists fear low natural gas prices will weaken the case for renewable power development, and even the nuclear lobby cannot compete with natural gas at $2/tcf without subsidy.
Improving fuel consumption from conventional engines and hybrids, coupled with falling petrol prices, would severely hinder the already fragile market for electric cars, raising questions about all those billions being poured into lithium ion battery plants around the country.
But an energy-secure and energy-independent United States may also be a less internationalist and engaged country, not as concerned about maintaining influence in the Middle East or Asia as it has traditionally been. Much will depend on political support and environmental objection to the development of shale oil resources in the years ahead.
The pace remains uncertain, but one truism is likely to prevail: if resources lie under the ground and it is economic to exploit them, then sooner or later, they will be exploited.
By. Stuart Burns