Doubts cast on U.S. oil independence


(Photo: Matthew Staver/Bloomberg via Getty Images)

Among the petro-punditocracy a new theory is rapidly gaining adherents. Since it has no name, let’s lend it one: Trough Oil. It holds that the United States has reversed a 35-year decline in its domestic oil production and will soon become a net exporter. The most recent support comes from the International Energy Agency, a Paris-based intergovernmental energy adviser. Its latest long-term projections, released in November, envision U.S. output surging due to tight-oil plays such as the Bakken formation in North Dakota and the Eagle Ford shale in southern Texas. Deep-water production, too, will contribute. Add to that falling U.S. consumption, and the U.S. could become a net oil exporter around 2030.

Not so fast. Just like the Peak Oil arguments popular a few short years ago, Trough Oil is also founded on some shaky assumptions and has its share of skeptics. “We don’t think the U.S. can become the largest oil producer in the world,” Deutsche Bank energy analyst Paul Sankey told clients in reaction to the IEA estimates.

Since U.S. production hit a low of 6.9 million barrels a day in 2008, new technologies like hydraulic fracturing and horizontal drilling allowed exploitation of resources that were not previously viable. And the U.S. government opened new areas for exploration. Last year, output reached 8.1 million barrels per day. Meanwhile, changing consumer habits and a recession meant that consumption fell. A handful of smug pundits repeated what they’d said all along: high oil prices prompt more exploration, technological innovation and, ultimately, more oil.

The IEA is but the latest to extrapolate these trends into the distant future. One crucial assumption is that crude prices will average comfortably above US$100 a barrel (in 2011 dollars) in the coming decades. But U.S. oil is disadvantaged at the moment. West Texas Intermediate currently trades at a 20% discount to Brent Crude, partly because of all the new supply arriving from the central U.S. and Canada. Given that the U.S. effectively bans crude exports, it’s proving devilishly difficult to erase that gap. Deutsche Bank’s analysts expect a discount between US$10 and $20 a barrel will persist, which would dampen enthusiasm for North American development. “The growth cannot be sustained,” they conclude.

Every incremental new barrel of U.S. crude must compete with other sources from Canada, Latin America and elsewhere. Peter Tertzakian, chief energy economist at ARC Financial in Calgary, argued in written reports that the surge in North American production thus far (which includes new oilsands production) has largely displaced relatively costly crudes from Mexico and Venezuela. But should the U.S. continue ramping up production, the resulting new barrels will go head-to-head with lower-cost crudes. Estimates of the marginal cost of new U.S. light-oil barrels are now US$80 or more, and Deutsche Bank’s analysts think they could reach $100 “as U.S. geology for marginal oil growth seems to be getting tougher.” Tertzakian, too, believes predictions of U.S. oil independence “are almost certainly overzealous.”