World Review | US set to become world’s top oil producer

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US set to become world’s top oil producer

US set to become world’s top oil producer
Drilling at the Niobrara shale oil fields in north eastern Colorado (photo: dpa)

THE US is riding high on an energy boom and is set to become the world’s number one oil producer by 2020 – knocking Saudi Arabia off the top spot.

This could redraw the global energy map, with potentially far-reaching consequences for energy markets and trade, says the International Energy Agency (IEA).

The surge in unconventional oil output – made possible by advances in new technology – will see benefits to the US economy, employment, and government revenues - and will move the US towards being self-sufficient in energy.

The US Energy Information Administration (EIA) and the IEA confirmed, in two major reports published in December and November 2012 respectively, the increasing role of unconventional oil in US production with the US becoming will become the world’s largest oil producer by 2020.

US conventional oil production – that is oil produced by traditional methods – reached a peak in 1970. Production then declined by almost 40 per cent by 2008.

In 2009, and for the first time in the last four decades, oil production showed a steady increase.

This is because of a combination of factors.

The increase in production has been driven by contributions from unconventional oil – tight oil – which has offset declining production elsewhere in the country. Production of tight oil increased from 540,000 barrels per day in 2008 to an average of 2 million barrels per day (Mb/d) in 2012.

High oil prices have encouraged explorers to invest in what was previously considered as a non-commercial resource. It is estimated that investment in unconventional oil requires a price of at least US$80 to become economic.

The investment friendly and competitive environment in the US has stimulated innovation. New drilling techniques, including hydraulic fracturing, which were applied first to shale gas reserves – are now being used to unlock the US large unconventional oil resources.

The US is the world’s largest oil consumer, representing 20.5 per cent of global demand. It is also the world’s third largest oil producer after Russia and Saudi Arabia.

If the IEA’s scenario materialises, it will benefit mostly the US economy.

Additional investment in upstream oil means larger taxes paid to the US authorities and more jobs created. The balance of trade will improve as a result of lower import bills (and higher export revenues if the US becomes a net oil exporter).

Additional oil supplies in the US – everything else being equal – simply mean a lower oil price. Since oil enters into every aspect of modern life, this means that not only will consumers pay less for petrol at the pump but US industries will face lower operating costs and can therefore become more internationally competitive.

An increase in domestic production will also hasten progress towards achieving energy independence, which has been the main focus of US energy policy.

Geopolitically, as the US becomes less dependent on oil imports from the Middle East, it will lessen the need for its presence (directly and indirectly) in the region.

The US may well be on the path of achieving energy independence. But experience shows that this may not necessarily lead to security of oil supply. On the contrary, oil imports can stabilise the US domestic market if a hurricane, for example, destroys major oil production facilities in the Gulf of Mexico.

Dr Carole Nakhle

Our Expert: Dr Carole Nakhle Dr Carole Nakhle is the Director of Crystol Energy. An Energy Economist by training, she is Associate Lecturer in Energy Economics at the University of Surrey ...

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