The Economist: Black Gold
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Recent headlines may have caught you by surprise: the United States is on track to once again be the top oil-producing nation in the world. Just a few years ago, the pace of production growth we are now achieving would have been seen as highly unlikely if not downright impossible. However, the combination of high prices, new discoveries, and technology advances is generating a surge in US production capacity.
Currently, Saudi Arabia supplies more oil than any other nation (about 11.6 million barrels per day--bpd) according to the Energy Information Administration, followed by the United States (10.9 million barrels each day) and Russia (10.3 million). From about 2004 until this year, Russia ranked second, but American production has now surpassed Russian capacity (which is hardly growing).
Since 2000, world production is up some 14%, from 77.7 million bpd to 88.7 million. Over the same period, Saudi Arabian production rose by almost 23%, while the United States’ went up 20% and Russia’s jumped nearly 54%.
However, looking at just the past five years (from 2007 to second quarter 2012), the story is quite different. Global production was up 5%, with expansion of less than 5% for Russia, 13% for Saudi Arabia, and nearly 29% for the United States. If these relative growth rates are maintained, the United States stands to emerge as the top oil producer.
As a major oil and natural gas producing state, Texas is playing a notable role in this expansion. Oil and natural gas exploration and production activity has been on a strong upward trend. Shale formations around the state are the site of substantial activity, as are oil fields once seen as essentially played out which are being reworked with new methods.
The driving forces behind the upswing in US production are, as noted, high prices, newly found resources, and better recovery methods. Oil once considered too expensive to produce has now become economically viable. Horizontal drilling has allowed for production in narrow plays. Hydraulic fracturing has unlocked oil and natural gas from shale formations. If you had asked industry analysts and experts to predict these patterns 10 years ago, few would have been able to do so with any degree of accuracy.
Even with this notable production increase, however, the United States is still a large importer of crude oil. Last year’s average consumption was 18.8 million bpd, compared to domestic production of an average of 10.1 million. America remains far and away the largest consumer of oil, using about 21% of the total world production. In addition, US proven reserves are small compared to some parts of the world, despite better recovery methods.
“Energy independence” is often discussed in domestic policy debates. However, even with rising domestic production, it is highly unlikely that this objective can be attained in the foreseeable future. A more appropriate goal is “energy security,” whereby America has the ability to obtain its supply of oil in reliable quantities from more stable and predictable sources. By developing US fields, we are moving toward that objective. In addition, projects such as TransCanada’s pipeline which allows us better access to substantial Canadian supplies are a step in the right direction.
Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.