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The U.S. Oil Production “Mirage”

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Robert Rapier

Robert Rapier

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How U.S. Shale Flipped The Script In Global Oil Markets

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In the previous article, Asia’s Insatiable Oil Demand, I covered global and regional oil consumption numbers according to the recently-released 2018 BP Statistical Review of World Energy.

To recap, global oil consumption rose to a new record high in 2018 and has now increased in 31 of the past 34 years. Over the past decade, global oil consumption has increased by 11.1 million barrels per day (BPD). The primary driver behind the past decade’s demand jump is the Asia Pacific region, which was the source of 77 percent of the world’s demand growth over that time.

Today, I want to discuss the source of the world’s new oil production in recent years.

A decade ago, in the summer of 2008, the price of West Texas Intermediate (WTI) crude was racing toward $150 a barrel. Over the previous three years, the world had only increased oil production by 1.2 million BPD, and it essentially all came from OPEC.

Many analysts, including me, were extremely concerned about the future hold OPEC would maintain over the world’s oil supplies. It appeared that there would an enormous transfer of wealth from those countries dependent upon oil imports — like the United States — to OPEC countries. In many cases, these countries have interests that are hostile to those of the U.S., so this was very much an issue of national security.

But the future played out differently than it seemed it would in the summer of 2008. Unbeknownst to most people, oil producers were experimenting with a marriage between two established oil drilling technologies — horizontal drilling and hydraulic fracturing.

The success of this marriage would unlock oil in tight oil and shale oil deposits that had previously been too expensive to recover, and would result in one of the greatest oil booms the world had ever seen. In fact, the “fracking revolution” caused U.S. oil production to turn upward in 2009, and then rise over the next seven years at the fastest rate in U.S. history.

While it is still true that OPEC produced 42.6 percent of the world’s oil in 2017, the majority of new oil production since 2008 has come from the U.S.

Oil Supply Growth 2008-2017

Of the 10.3 million BPD of new oil production since 2008, the U.S. supplied 6.2 million BPD (60 percent). The world’s two other major oil-producing countries, Saudi Arabia and Russia, saw their production increase by 1.7 million BPD and 1.2 million BPD respectively since 2008.

OPEC overall increased its production by 3.6 million BPD since 2008, primarily as a result of production growth in Saudi Arabia, Iraq, and Iran. But OPEC’s gains were limited by production declines in Venezuela, Libya, and Nigeria. There were also regional production declines in Europe, Asia, Africa, and South and Central America. Related: Oil Prices Slip As Rig Count Inches Higher

Also notable is that Canada and Mexico are major oil producers (although Mexico’s production has been declining). Overall, North America supplied 20 million BPD of the world’s oil in 2017 (22 percent). This was ahead of every other region of the world except for the Middle East, which produced 31.6 million BPD, or 34.1 percent of the world’s total.

According to the BP Statistical Review, the U.S. now leads both Saudi Arabia and Russia in crude oil production. This is in part because BP’s definition of “oil” includes natural gas liquids (NGLs), which grew by about two million BPD in the U.S. as natural gas production boomed. Without the NGLs, the U.S. would probably have been behind Saudi Arabia, but probably not Russia, in total oil production.

It is hard to overstate the consequences of the fracking revolution, because the U.S. oil production surge broke OPEC’s stranglehold on global oil prices. But U.S. tight oil production will inevitably slow and once again begin to decline. The key questions are how soon this will happen, and whether a return to >$100/bbl oil — and in turn OPEC’s stranglehold — awaits that inevitability.

By Robert Rapier

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  • Kishore Kumar on July 28 2018 said:
    Long live american shale.
  • Mamdouh G Salameh on July 28 2018 said:
    Since the discovery of oil in Pennsylvania, USA, the United States has been at the cutting edge of oil technology. The US shale oil revolution is no exception.

    However, we should not exaggerate the impact of US shale oil production on the global oil market and prices for three reasons.

    The first is that despite the rise of US oil production as a result of rising shale oil production, the US is still the world’s second largest crude oil importer after China. With a US domestic consumption of 20.08 million barrels a day (mbd) in 2018 and a production of 10.8 mbd, the US must import 9.28 mbd to make ends meet. In 2017 the US imported 10.08 mbd according to the 2018 BP Statistical Review of World Energy. While it is true that the US has been exporting some ultra-light tight oil and refined products, it has also been importing equivalent amounts of medium and heavy crudes for its refineries which are tooled to handle such crudes.

    Another reason is US oil exports while growing are still small in the range of 1.5-2.0 mbd so their impact on global oil supplies is very limited. Moreover, US ultra-light oil exports don’t compete with crude oil supplies as they are sold to refineries for blending with heavier crudes.

    A third reason is that the US shale oil industry is not a profitable one. Shale oil drillers continue to produce at loss in order to attract more investment from Wall Street to stay afloat. They are like ‘robbing peter to pay Paul’. Without this capital the drillers would not have been able to continue growing their production since their operating cash flow from existing wells came nowhere near the amount needed to grow production. Eventually, investors will realize that there is no long-term value in Shale oil.

    The claim by BP Statistical Review that the U.S. now leads both Saudi Arabia and Russia in crude oil production is farcical to say the least. BP includes in its production figures natural gas liquids (NGLs) which come from natural gas wells as well as such gases as ethane, propane, butane and pentanes which may not qualify as crude oil. Without the NGLs, the U.S. would probably have been trailing behind Russia and Saudi Arabia respectively.

    The real question is whether natural gas plant liquids can be sold as oil on the world market. The answer is a resounding “No”. In fact, major oil exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And if major exchanges don’t accept natural gas liquids as crude oil, then they are not crude oil or as a well-known Texan oilman, Jeffrey Brown, pointed out:” If what you are selling can’t be sold on the world market as crude oil, then it’s not crude oil”.

    OPEC which accounts for 71.8% of the global proven oil reserves and 42.6% of global oil production will remain the fulcrum of the global oil markets for years to come. US shale oil production can do nothing to the status quo.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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