U. S. Energy Dominance Emerges
 
Imagine a world where the United States sets the price of oil.  Imagine a world in which Saudi Arabia imports energy from the United States.  Imagine a world where U. S. energy gives the North American Continent the world’s best manufacturing costs across most industrial sectors.  Imagine a world in which American foreign policy is not dependent on what happens in the Persian Gulf.  And imagine a world where petrostates like Russia and Saudi Arabia are forced to diversify and make fundamental reforms if they have any hope of surviving the 21st century.

As unbelievable as it might seem to those locked into the economic assumptions of 1973-to-2013, that’s the world we’re in!

It’s coming at us faster than most people can comprehend.  Less than four years ago, The Washington Post warned that green energy would make fossil fuels obsolete, leaving oil and gas producers with “stranded assets.”  Others predicted that U. S. coal would soon just be a “bad memory.”

Yet, forty years ago, the Trends editors knew about the energy bonanza trapped in North America’s shale deposits, as did the U. S. Geological Survey.  So, even then, it was clear that OPEC’s dominance would last only as long as it took for innovation to cost-effectively unleash this astonishing natural resource.  That meant that “peak oil” was simply an irrelevant fantasy promoted by those advocating so-called renewable energy.

The unpredictable wild card in the game was the implacable commitment of “green ideologues” to thwarting this vision of U. S. energy dominance.  And, in retrospect, their success in coopting the coercive power of the state did come frighteningly close to crippling the industry.

But fortunately, we’ve jumped both the technological and man-made hurdles and the future looks exceedingly bright.

According to research firm, Rystad Energy, the United States is poised to ramp up crude oil production by at least 10% in 2018 to over 11 million barrels per day.  Surging shale oil output will allow the United States to finally dethrone Russia and Saudi Arabia as the planets leading crude oil producer.  That’s important because, even though the United States has been the top “energy producer” if you include coal and natural gas, it hasnt been the global leader in crude oil, since Gerald Ford was President, back in 1975.
 
As Rystad explains, the fracking revolution has turned America into an energy powerhouse and President Trump has vowed to further accelerate that transformation by cutting regulations and opening up Federal land.  This long-term shift will end U.S. reliance on foreign oil, especially from the turbulent Middle East.  While it will still import heavy oil from Canada for certain purposes, this will be offset by shipments of light oil and natural gas to Canada.

The critical inflection point in this transformation was when U.S. oil production didnt collapse in the face of the ill-conceived price war, which Saudi-led OPEC launched in 2015.  OPEC’s objective was reclaiming market share lost to shale and other players.  The strategy involved creating a massive supply glut that caused crude to crash from around $110 a barrel to a low of $26.
 
These very low prices forced shale companies in Texas, North Dakota and elsewhere to dial back.  And, according to the U.S. Energy Information Administration, U. S. domestic output bottomed at 8.5 million barrels per day in September 2016, which was down 11% from peak production in April 2015.

But, after a painful shakeout in the industry, which involved scores of bankruptcies and significant job losses, a steadier shale-drilling industry arose, anchored by better-financed companies and a world-class cost structure.

Now, with the price of West Texas Intermediate crude around $65 a barrel, a level not seen in almost three years, the United States is becoming the world’s dominant producer.  The U. S. industry is now able to outflank competitors in supplying growing global markets, particularly China and India.

This is a 180-degree turn for the United States and the impacts are being felt around the world.  This not only contributes to U.S. energy security, but also contributes to global energy security by bringing new supplies to the world market.

Technological advances which let producers cost-effectively unlock oil from tight rocks like shale have led to a drilling frenzy that enabled a doubling of output in a decade, transforming unlikely parts of North Dakota and New Mexico into world class petroleum hubs. And, new pipelines are being built across Texas to cost-effectively serve ports where oil can be pumped onto tankers headed for China, India and other markets.

Domestic production in 2017 averaged 9.3 million barrels a day, and the Energy Department projects that the figure will average 10.3 million barrels a day this year, surpassing the record set in 1970.
 
Already, since the 40-year export ban was lifted in 2015, exports of American oil have risen to roughly two million barrels a day; that’s more than many OPEC members.  In 2016, the U.S. first tested the export waters. Then, in 2017, purchases of U.S. light, sweet crude skyrocketed as pipeline and dock infrastructure was built-out and the wide price-spread between foreign and domestic crude coaxed more cargoes abroad.

Canada, once the only regular buyer of U.S. crude, now finds itself competing with refiners in Europe and Asia.  And, China’s appetite for American oil is voracious: in April, China bought more than Canada did for the first time.

The Department of Energy now projects an additional increase in domestic production of 500,000 barrels a day in 2019, though it could be higher if the global boom drives prices above $70 a barrel.

Here’s the big story for the global economy and OPEC: the United States, by the sheer force of its production, the supremacy of its technology, and an unmatched pipeline, refinery and storage infrastructure, has put a ceiling on the global price of crude.  Why?

According to experts, whenever oil climbs to $60 a barrel and higher, as it has recently, an American drilling rush commences; that explains why the national rig count has climbed by over one-third in the past year.  That drilling rush refills domestic and even global energy inventories, stopping the price rise in its tracks.  Only a major war in the Persian Gulf or other similar disruptions are likely to send prices soaring any time in the next 20 years.

Given this trend, we offer the following forecasts for your consideration.

First, exports of U. S. oil will continue to soar through at least 2025.

According to the most recent stats from the Energy Information Administration, the United States exported a record 1.7 million barrels of oil per day in October 2017, only two years after lifting the 40-year ban on oil exports. Thats four times as much as in 2015, when federal law prohibited shipping oil to most places except Canada. Notably, lifting the export ban coincided with three crucial developments:

- an agreement by OPEC and Russia to rein in output,

- a stronger global economy creating more demand for oil, and

- a weaker U.S. dollar making U. S. oil cheaper for foreign buyers.

And with oil commanding a higher price, U. S. producers are profitably pumping more, especially from shale hotbeds like the Permian Basin of West Texas and New Mexico.  ? Without the outdated constraints, much of that oil is finding a home overseas.  According to energy research firm, ClipperData, after Canada, the top destinations for American crude in 2017 were China (buying 16.5%), Britain (buying 11.3%) and the Netherlands (buying 8.4%).  Luckily for OPEC, outdated U. S. pipelines, shipping terminals and docks still badly need upgrades.  And, U.S. exporters must still use smaller, less-economic tankers or complex shipping arrangements, which add to costs. Waiting for fixes, will limit the speed of America’s export ramp-up, but everyone sees it coming like a freight train.

Second, within the next decade, Saudi Arabia will import up to 12 million metric tons of Liquified Natural Gas a year, much of it from the United States.

As highlighted previously in Trends, U. S. natural gas has become the world’s most cost-effective energy source for electricity generation.  This cost advantage makes it smart for the Saudis to switch from oil to natural gas for electricity generation; that will free up more Saudi oil for export.  To this end, Saudi Aramco, has had initial conversations about taking a stake in Tellurian Inc., a liquefied-natural-gas developer based in Houston.  Separately, it has inquired about purchasing oil and gas assets in two giant U.S. oil-and-gas basins, the Permian and Eagle Ford.  Any effort to acquire American oil-and-gas production assets would mark a watershed moment for Saudi Arabia.  It has been the world’s top exporter of crude oil for decades, but booming U.S. production has shaken the kingdom, depressing prices and compelling the government to rethink its dependence on revenue from its massive petroleum reserves.

Third, the effective “price ceiling” the North American Energy Revolution has placed on oil and oil-substitutes like natural gas, will unleash explosive economic growth worldwide.

Knowing that oil will remain mostly in the range of $50-to-$65 per barrel for the foreseeable future will dramatically shift the demand curve.  Similarly, with U. S. shale producers making money at $35 to $40 a barrel, supply growth will remain strong.  Going forward, businesses, consumers, and government will all benefit from lower energy prices.  Consumers, businesses, and governments around the world will collectively save trillions of dollars and that will enable them to invest in technology, pay higher wages, and provide goods & services at lower prices.   As we explained in Ride the Wave, the North American Energy Revolution provides the critical context for the next phase of the Digital Techno-Economic Revolution.
 
Fourth, despite environmentalists’ screams, fossil fuels will still satisfy roughly 80% of U. S. energy demand, 32 years from now. 

 
Most experts believe, wind, water,  solar, and biomass will provide just 10% to 15% of U. S. energy needs in 2050.  As explained in prior issues, the economic equations simply don’t work.  That’s why fostering the myth of peak oil was crucial to those wanting to replace fossil fuels.  Only in a world without abundant and accessible fossil fuels could renewables hope to compete.

 
Fifth, nuclear will make a surprising comeback in the years past 2050.

The Trends editors believe that small-scale nuclear fission technology based on thorium and liquid-metal heat-exchangers will replace coal for base-load electrical generation well before the end of the 21st century.  Concerns about the safety and proliferation risks associated with Uranium-based nuclear fission have not been resolved, leading to its steady decline as a commercial alternative to coal.  But the new technology avoids these major risk factors.  Fusion-generated electricity is the “dark horse” alternative that might work for China, and the OECD countries, but is likely too scale-dependent for the rest of the world. And,
 
Sixth, over the next 25 years, petrostates will be forced to reform or perish. 

It’s likely that we’ll not see oil prices over $100 a barrel, except for brief periods, during the next 30 years.  That means most OPEC countries as well as Russia will have to dramatically transform their economies.  The welfare state in countries like Venezuela and Saudi Arabia is simply not sustainable.  The Trends editors believe that the wide-ranging reforms forced on the Saudis by Crown Prince Mohammed bin Salman are in preparation for building a new, more competitive economy.  Countries like Venezuela, Nigeria, and Libya don’t have the cash reserves needed for this kind of transformation, so we’ll have to wait and see how they deal with their poor prospects.

References

1. com, November 14, 2017. Ivana Kottasova.   Americas oil and gas output could soar 25% by 2025.

http://money.cnn.com/2017/11/14/news/economy/us-oil-gas-shale-iea/index.html?iid=EL

2. com, January 3, 2018. Matt Egan. America could become oil king of the world in 2018

3. http://money.cnn.com/2018/01/03/investing/oil-us-russia-saudi-arabia-shale/index.html

4. The Wall Street Journal, Dec. 20, 2017. Sarah McFarlane and Summer Said.

5. Tables Turned: Saudi Arabia Hunts for Oil Assets in the U.S.

https://www.wsj.com/articles/saudi-arabia-searches-for-shale-oil-deal-1513782415

6. The Wall Street Journal, Dec. 20, 2017. Summer Said, Benoit Faucon and Christopher Alessi. OPEC, Other Oil Producers Agree to Extend Cuts Through 2018.

https://www.wsj.com/articles/opec-is-expected-to-extend-output-cuts-but-questions-remain-over-length-1512029573

7. Bloomberg, Dec 12, 2017. Laura Blewitt. US Fuels the World as Shale Boom Powers Record Oil Exports.

https://www.rigzone.com/news/wire/us_fuels_the_world_as_shale_boom_powers_record_oil_exports-12-dec-2017-152774-article/

8. Bloomberg, January 19, 2018. Angelina Rascouet.  IEA Sees ‘Explosive’ Growth in U.S. Oil Output as Prices Rally.

https://www.bloomberg.com/news/articles/2018-01-19/iea-sees-explosive-growth-in-u-s-oil-output-as-prices-rally

9. The New York Times, January 28, 2018. CLIFFORD KRAUSS. Oil Boom Gives the U.S. a New Edge in Energy and Diplomacy.

https://www.nytimes.com/2018/01/28/business/energy-environment/oil-boom.html#story-continues-1

10. Carpe Diem, February 6, 2018. Mark J. Perry. Department of Energy projections to 2050 suggest that fossil fuels, not renewables, are the energy sources of America’s future.

https://www.aei.org/publication/chart-of-the-day-despite-all-of-the-hype-and-hope-americas-energy-future-will-be-based-on-fossil-fuels-not-renewables/

11. S. Energy Information Agency, February 6, 2018. Annual Energy Outlook 2018.

https://www.eia.gov/outlooks/aeo/