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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Why The U.S. Can’t Be Called A ‘Swing Producer’

Why The U.S. Can’t Be Called A ‘Swing Producer’

Daniel Yergin and other experts say that U.S. tight oil is the swing oil producer of the world.

They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

A swing producer must meet the following criteria:

• A swing producer must be a net exporter of oil.

• A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.

• A swing producer must be able to act authoritatively and quickly to increase or decrease output.

• In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.

• A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

So, let’s go down the list for OPEC and U.S. tight oil. Related: 10 Key Energy Trends To Watch For In 2016

OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.

Figure 1. OPEC and U.S. 2014 net crude oil exports.
Source: OPEC & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

This will not be substantially changed by the repeal of the crude oil export ban because U.S. consumption of crude oil (16.3mmbpd) exceeds domestic production (9.2 mmbpd) by 7.1 mmbpd. If exports of tight oil increase, imports will have to increase by an equal amount to meet demand.

That should be enough to end the discussion about whether U.S. tight oil is a swing producer but I will finish going through the list. Related: Oil Prices Continue To Slide As Gasoline Inventories Build

OPEC exists because none of its members alone meet the criteria needed to balance the market and affect prices. OPEC produces 31.4 mmbpd of the crude oil + condensate (47 percent of world production). It has approximately 1.5 million barrels per day (mmbpd) of spare capacity, and it has 72 percent (1220 billion barrels of oil) of the world’s proven reserves (Figure 2). The members of the cartel represent countries whose leaders have the authority to cut or increase oil production at will. Saudi Arabia alone has about $660 billion in cash reserves. Its production costs are less than $10 per barrel.

Figure 2. Comparison of OPEC and U.S. tight oil production, spare capacity and reserves.

Source: EIA, Drilling Info & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

U.S. tight oil accounts for less than 5 percent of the world’s production of crude oil + condensate (3.7 mmbpd). It has approximately 0.23 mmbpd of spare capacity and less than 1 percent of the world’s proven reserves (13 billion barrels of oil). U.S. tight oil producers do not and cannot act together. Tight oil producers spend twice as much money as they make, and have up to 5 times more debt than annual revenue. Its production costs are $65-$70 per barrel.

U.S. tight oil is on life-support at $35 per barrel oil prices.

OPEC is a swing producer. U.S. tight oil is not. Related: BP’s CEO Finally Sees Oil Prices Bottoming Out

Truth vs. Confirmation Bias

In April 2015, Yergin told CNBC, “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”


What he meant was that over-production of U.S. tight oil helped cause the global price of oil to collapse in 2014, to swing down. It had nothing to do with really being the swing producer.

That was a few days before CERA Week, the pricey annual love-fest that Yergin’s company IHS throws in Houston for the oil and gas industry to feel good about itself. It was a clever-sounding trailer to publicize the $7,000-per-ticket event.

Later, in June 2015, Yergin told the Wall Street Journal that “now the U.S. is a swing producer, albeit an inadvertent swing producer as it didn’t set out to take that role.”

A swing producer cannot be inadvertent. A swing producer deliberately increases or decreases its production to balance the market, whether for short-term price advantage, or for demand stimulation and long-term price advantage and market-share.

Either Yergin doesn’t understand what a swing producer is or his swing-producer comments were manipulative and meant to support some agenda.

Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye.

Yergin said the U.S. was the new swing producer. What was heard was that America had made OPEC impotent. It was repeated enough by the press and other supposed experts that its truth was confirmed because people want to believe it–even though it is untrue.

Confirmation bias is the tendency to find support for our preconceptions. It may make us feel good but it is a poor basis for decisions. Investors beware.

By Art Berman for Oilprice.com

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  • Conrad Maher on January 06 2016 said:
    Art has given us a clear, concise message about who controls the price of crude oil and how they do it. Those who have the reserves, spare production capacity and low cost oil are and will remain in control and that certainly does not describe the facts for the US production of crude oil.
  • Ken Church on January 06 2016 said:
    This leads to a very interesting question . I US tanks are full to the top one has to assume that someone in the US is importing oil rather than using up oil stored in the US. Who is that and why is it happening?
  • Lee James on January 06 2016 said:
    Right-on. If you want to visit a time machine and go in the reverse direction, just tune into what Chief lobbyist, Jack Gerard, and the American Petroleum institute are still saying today. Their line might have been a teeny bit defensible a couple of years ago. Until the middle of last year, Americans wore blinders and saw only the flow of crude. We chose not to look at the cost of extracting and transporting a barrel. Now folks are starting to notice that the available volume of the more affordable U.S. conventional oil is going down, while the volume of expensive unconventional oil is trending upward.

    The API would still like for us to pretend like we are a net oil exporter and a swing producer, and the tech revolution has solved production cost problems.

    Fortunately, even though API does not know we are in year 2016, I do not hear much investor hype today.
  • Seth on January 07 2016 said:
    Art, nice article.

    "Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye."

    In my opinion, it's not important whether the U.S. is nearly energy independent, the key point is that shale has allowed the U.S. to dramatically lower imports while generating hundreds of thousands of new jobs. It's also pretty clear that shale has had very significant geopolitical benefits to the U.S. and has placed a de facto ceiling on price increases. If/when prices rise, shale pumps faster, when it drops, uneconomic plays decrease like energy storage.

    Regarding sticking our "thumb in OPEC's eye," it's pretty obvious with the very low cost of oil (many thanks to shale) that shale has helped render OPEC a paper tiger. Just look at what is happening to Saudi Arabia, home to 15 of the 19 911 hijackers.

    "Saudi Arabia, which in 2015 got about three-fourths of its total revenue from oil, is known for its robust state welfare programs. The nation's roughly 30 million people don't pay income or sales taxes, and items like fuel and food are traditionally heavily subsidized. The youth unemployment rate is about 30 percent.

    But oil prices recently hit an 11-year low, and Saudi Arabia refused to limit production in response. This, in turn, led to a deficit of about $98 billion this year, the Wall Street Journal reported. With no signs of the trend changing, the government decided to cut public spending in 2016."
  • Elizabeth Erwin on January 07 2016 said:
    I have heard the governor of North Dakota quoted as saying that the cost of production in the Bakken field is $24 per barrel. If the average for the shale producers is $60 - 65, is that an all-in cost or is there really that much variation for U.S. producers?
  • Charles on January 07 2016 said:
    Some of the criteria for "Swing Producer" are wrong.

    In particular, there is no need to be a net exporter. Oil is fungible. If you pour water into a swimming pool, it does not matter which end of the pool the water was poured into, the water level still rises. This is also true for Oil. It does not matter if the oil is exported; if the result is fewer imports, the effect is the same as if someone outside the country were producing (and exporting) more oil into the world market.

    In addition, the requirement for "spare capacity" is important in being a swing producer only when everyone else has little or none and the market is driven by demand, not supply.

    When, however, the market is driven by supply and demand is lackluster, the "Swing producer" is the entity that can most readily (more willing, less cost, less friction, etc.) reduce supply to the market. To believe that in our current environment, any country that is able to significantly spin up even more production is the swing producer is ludicrous.

    While the US may not willingly be placed in that role, the fact that we are not a controlled, centrally planned economy, and that our activity is entirely dependent upon profitability and cashflow rather than on State interests, means that the US may be the largest supplier who has the will and political ability to reduce production so that things are stabilized.

    By any other name that would still be a Swing Producer. It is where we are now.

    Surprisingly we have not stopped producing even under these dreadful prices, but we will. Investment dries up and production drops will follow. The world production of oil will balance against demand once again, and the US Industry will take the brunt of that.
  • kyaw thu han on January 09 2016 said:
    Swing producer means someone who can stabilise the price by producing more or less. that's what Saudi perform in the 1980s and 1990s. but now the shale oil can take that role because 1) it can stabilise the oil price by placing a price cap. 2) it can produce more or less very quickly..people think that if saudi decided to cut a million barrel of oil, the price will go up to 80$ easily. but indeed the shale oil can produce as much as oil saudi cut..
  • Jan de Bruin on September 05 2016 said:
    It depends on how you define 'swing producer'. Take shale oil production. If oil sells at 50 USD per barrel and it costs me only 40 USD to produce one barrel then I will continue to produce at maximum capacity. I make a healthy 10 USD profit on every barrel. If the oil price drops to 45 USD per barrel then being used to a certain income I will certainly not produce less but perhaps try to double production so that my income remains the same. As the price drops further this becomes harder and harder and as soon as the price reaches 40 USD per barrel I will stop producing. When the price increases again to above 40 USD per barrel I will start producing again. The 'swing' price is now 40 USD per barrel. Since shale oil production can be 'switched on or off' relatively quickly the price will never deviate far from this price. 'Relatively quickly' here means in comparison with the multi-year projects to develop conventional oilfields that the industry has become used to.
    This refers to a static situation where my cost per barrel is always the same. In reality it costs me more to drill a new well then to keep producing from a well that has been drilled in the past. There are two different oil prices that are relevant to me. Say above 80 USD per barrel I will feel confident to drill more wells. Between 40 and 80 USD per barrel I will no longer drill wells but I will keep producing from existing wells. Below 40 USD per barrel I will stop producing.
    At the same time I will look for cost reductions. Can I get materials cheaper? Or services? Can I produce more efficiently or drill more efficiently? If so then those two prices 40 USD per barrel and 80 USD per barrel will become lower.
    There's not only me. Different big and small producers have different 'break even' prices and there will be some ramping up and ramping down when the price passes the 'swing price'. I mean it is not like an on-off switch but the shale industry as a whole can respond much faster to price fluctuations than the traditional oil industry. Therefore I think at the moment we can call the shale industry by the name 'swing producer'.
    In the event that Saudi would want to they could become the swing producer (again) by increasing production until the price has fallen to say 30 USD per barrel and reduce production again when the price drops further. In this way they could maintain the price at around 30 USD per barrel. The above mentioned shale producer would stop producing until he had found a way to reduce his costs to below 30 USD per barrel. In the short term this could be a viable strategy for Saudi in order to retain market share. The risk is that shale producers will indeed find ways to reduce their costs to below 30 USD per barrel. This together with the fact that there are apparently abundant shale oil reserves in North America and other places means that for Saudi it would only mean a delay to either loss of market share or a further reduction in oil price.

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