Why Saudi Arabia Should Fear U.S. Oil Dominance

One of the more important recent developments in global energy is the resurgence of U.S. energy production, thanks in large part to the shale revolution.

Now, after half a century as a net importer, the U.S. is poised in the coming decade to become a net exporter, as imports from historic sources decline and demand for U.S. energy products abroad grows.

According to the IEA’s World Energy Outlook, the U.S. is set to be a dominant force in energy production for the foreseeable future, as the surge from shale triggers the biggest boom in production in more than 50 years.

By 2025, increases in U.S. gas and oil production will turn the country into a net exporter of fossil fuels for the first time since 1948. The U.S. will remain the “undisputed leader” in oil and gas markets “for decades to come,” according to the IEA.

This prediction is derived in part from the IEA’s calculation of the recoverable reserves in the U.S., particularly shale, which the agency increased by about 30 percent to 105 billion barrels.

As analysts have noted, the IEA prediction means ‘lower for longer’ prices, as U.S. production exceeds expectations and meets most new global demand. In total, the U.S. will add more new output than Saudi Arabia during that country’s expansion in production between 1966 and 1981. This will likely keep prices depressed.

Rising exports in natural gas, particularly LNG, will allow the U.S. to become a net exporter by the mid-2020s, surpassing Qatar to become the world’s biggest LNG supplier. Oil exports will exceed imports by 2027; the U.S. government has predicted 2026.

Related: Falling Iraqi Oil Output Drags OPEC Production Down

Demand for U.S. oil that is light on sulfur—and thus cleaner—will increase as countries attempt to cut back on emissions, combat air pollution and comply with clean air rules. That could cause a jump in U.S. exports to about 4 million bpd by 2022, according to Enterprise Partners, a Gulf exporter.

This is a development of massive proportions, one that could have a huge effect on the shape of the global oil and gas market. For decades, the U.S. has been a major import market, but that could all change. Already, Saudi Arabian exports to the U.S. have taken a tumble, falling to their lowest level in 30 years: to 525,000 bpd from 1.5 million bpd a decade ago.

While the short-term cause for this has been the Saudi production cuts, as part of the OPEC production cut agreement, surging U.S. production could cause this decline in Saudi imports to become permanent, though it’s unlikely Saudi shipments will cease altogether. The U.S. is a large country, and demand/supply conditions vary in different regions.

Saudi crude will remain competitive, and as long as Saudi Aramco retains its massive refinery at Motiva in Texas, Saudi imports will continue, albeit at a reduced rate. Supply to Motiva from Saudi sources amounted to just 36 percent of the total, with more oil shipped from Iraq.

The Saudis don’t seem hugely concerned about their plummeting U.S. market share. They’re looking to Asian markets—particularly China and India—to meet their future needs. According to the Vision 2030 economic plan, the brainchild of Crown Prince Mohammed bin Salman, the Saudi economy will pivot away from dependence on fossil fuel production, diversifying in an attempt to become more flexible and less vulnerable to price shocks. The much-anticipated IPO of Saudi Aramco slated for next year is the first step. Related: China’s Mysterious Arctic Silk Road

It’s not accurate to talk about “energy independence” as long as energy remains a global commodity. The U.S. may begin exporting more than it imports, but that won’t reduce the need for imported crude, particularly from Canada and the Middle East, where crude remains cheap and abundant.

But it’s hard to argue with the historical significance of this transformation. For the first half of the twentieth century the U.S. was the world’s leading crude oil producer, producing more than half of all world supply. The requirements of war and peace sapped domestic reserves while a strategic shift to increase production in the Middle East caused U.S. production to decline relative to consumption in the 1940s. The U.S. became a net importer in 1948 and reached its maximum production level in 1970, whereupon it witnessed a 40-year decline in output and a massive spike in imports.

Now, that age seems to be coming to an end.

By Gregory Brew for Oilprice.com

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