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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Why Saudi Arabia Should Fear U.S. Oil Dominance

Oil

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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  • Connie Wurtig on November 15 2017 said:
    Very erratic inventory numbers, not consistent week to week.


    9.2bbls total draw last week and now a 2.8 bbls build? Someone check the valve on the S.P.R. it appears to be evaporating.
  • Guy Minton on November 15 2017 said:
    Lower for longer oil prices and the massive amount of shale production that is proposed are mutually exclusive
  • Lee James on November 15 2017 said:
    A lot can happen in 10 years -- the supposed time that the U.S. becomes a net oil exporter.

    I look forward to further articles in Oil Price about our oil import/export balance, maybe in three years.

    In three years time, we will have a pretty good idea if our conventional oil production will continue its slow and steady decline. We will know a lot more about the probable Permian Basin decline. We will see if further production costs are realized. We will know if other countries and U.S. states exact a growing price for carbon pollution -- or even a ban on some sources of pollution. We will see if it looks likely that an additional U.S. play is found to take the place of our current star: the Permian formation.

    10 years is kind of out there. It makes possible a lot of blue sky speculation. In the meantime, I hope we are prudently developing alternatives to the idea of burning up forever our resources, and leaving a long-lasting legacy of pollution. Something to think about.
  • Bazzline on November 16 2017 said:
    How do you figure the U.S. will become a net exporter? The U.S. consumes at least 20 million barrels a day and produces about 9.5 mb/d. So production will rise 10 million in 7 years?
    I think not!
  • David on November 16 2017 said:
    Ok. Great article but Saudi does not fear US production, US does not fear Saudi production. There is no war between US production and OPEC. Its real simple, Non OPEC and OPEC over supplied the world markets for years in a time for less demand and poor economies. The US drastically cut its rig count from over 1600 working rigs. OPEC continues to cap production with Russia. OPEC and NonOPEC continue to import and export for market share but all understand the market has been over supplied and, maybe without knowing, work together to stabilize prices.

    Today, demand and world economies are growing and OPEC and Non-OPEC will need to react as demand drives prices and production.
  • Steve on November 16 2017 said:
    No one can predict the future with any accuracy and those who have a vested interest in a particular narrative are especially susceptible to biases that support their view (or wishes). To suggest that the US will be a net exporter of fossil fuels depends on a lot of things going just right, something that seldom if ever happens. This site is littered with alternative interpretations of trends and ‘facts’ projecting that the US shale ‘miracle’ is not only long in the tooth, but on the precipice of collapse based upon hard, geoogical constraints. I think it is wishful thinking in the extreme to suggest the US will soon be a net exporter of energy. Is it possible? If everything aligns just right, maybe. But the IEA does not have a great track record when it comes to predicting the future. One is just as likely to predict the future with the flip of a coin or turn of a Crazy 8 ball.  
  • Joe Black on November 20 2017 said:
    The recency effect is strong. While we have had astonishing growth in shale production over the last few years, it is not as easy as looking at the production chart and scaling it over ten years. The reality is that the majority of Tier 1 geological areas in the Balkan and the Eagleford have already been drilled, and the Permian is not far behind. There is a marked difference between Tier 1 and Tier 2&3 geology. Technology can not overcome bad rocks. In five years, we are all going to wondering if this was some kind of bubble or if it was a scam.
  • Hauptmann on November 20 2017 said:
    The Saudis have little to fear from a US "oil dominance" except in the very short run. The US continues to be a significant net oil importer. The oil shale industry has been operating on increasing debt. Simply put, almost none of the output of that industry is at a net profit and that can't last. The conventional US oil industry output is under greatly increased pressure from the debt accrued and there is no end in sight for low oil prices. Exploration and investment are being squeezed badly to keep up with interest payments and share holder payments. The financial facts are easily available and I suggest starting with the SRSRocco Report to see just how misleading articles such as this are.

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