Energy Security: Oil Independence A Long Ways Off – 2/3/17

U.S. Presidents pledging to make America independent from OPEC oil isn’t new. Energy security has always been a concern for nations, and reliance on imported oil from unstable regions has caused serious problems in recent times. Problems which lead to George W. Bush’s attempts to reduce imports from the Middle East saying the nation was “addicted to oil”, but vowing and doing are very different things. In the end, oil shipments from OPEC to the U.S. rose more than 10% during Bush’s time in office.

Independence from the Middle East would equate to replacing about 2.7 million barrels a day (b/d) in net imports, a 30% increase in current domestic output — currently ~9 million b/d after the already massive increase following the shale drilling and fracking boom.

Still, the new goal is more obtainable than it once was. U.S. oil production has risen significantly in the last decade, so the nation was nearing energy independence even without prompting from the White House.

And shale explorers in the United States are expected to increase spending four times faster than the global average this year. According to Bloomberg, the number of rigs drilling for oil and gas in the U.S. and Canada has more than doubled since May.

As to when the U.S. reach some degree of energy independence, the EIA’s January Short-Term Energy Outlook could hold some clues.

The EIA forecasts an increase in U.S. crude oil production from an average of 8.9 million barrels per day (b/d) in 2016 to an average of 9.3 million b/d in 2018, primarily thanks to U.S. tight oil production in Texas from the Permian and Eagle Ford regions.

Although overall U.S. oil production has been declining since mid-2015, the EIA has observed increasing production in the Permian region. In 2016, Permian production averaged 2.0 million b/d, a 5% increase from 2015. Permian production is projected to average 2.3 million b/d in 2017 and 2.5 million b/d in 2018.

Compared with the Permian region, other regions have fared poorly. The next most successful region, Eagle Ford, saw declines with average annual production at 1.6 million b/d in 2015 and 1.3 million b/d in 2016. The EIA expects production in that region will only begin increasing again in the third quarter of 2017 amid higher oil prices.

Clearly a 0.4 million b/d increase in domestic production isn’t enough to make up for the 2.7 million b/d in imports from OPEC nations, but it is decent progress for two years.

Still, U.S. tight oil is relatively costly to pull out of the ground with even the best U.S. shale plays producing at break-even costs near $35.

The problem with just pumping more oil to reach energy independence is that increasing supplies by a couple million barrels per day would drive down prices. And compared to OPEC nations that can break-even selling at prices below $25 a barrel, no shale driller could operate profitably under the prices declines that large a difference in supply and demand would cause.

U.S. shale drillers may be extremely important as marginal producers, but unless OPEC imports are banned entirely, U.S. tight oil output will inevitably decline like it did over the last two years. Even in that unlikely even, a shift away from OPEC would probably do more to benefit Canada and Mexico than the U.S. The two countries supply 40% and 8% of all U.S. imports of petroleum, respectively.

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