Relevant and even prescient commentary on news, politics and the economy.

US to be leading producer of oil?? What does that mean?

Lifted from a note on energy from Reader rjs comes a link filled narrative on oil and production issues for oil.  He deals with one aspect of drilling for “energy independence”.

From reader rjs:

Saudi America?

The release of this year’s edition of the World Energy Outlook from the IEA (International Energy Agency) received quite a bit of media attention over this several weeks, mostly for its forecast that the US will overtake Saudi Arabia to become the world’s largest oil producer by around 2020. That such would happen shouldn’t be much of surprise to anyone who’s followed world oil production for any length of time; the Saudis, Russia and the US have been the world’s leading producers for at least 40 years.

 Just compare historical production for the US, for Russia, and for Saudi Arabia).  Our problem has always been that we’ve consumed more than twice our production, while the Saudis, with their smaller population and domestic usage, have been the world’s leading exporter and the one country seen as having reserves ample enough to backstop the markets. Apparently the IEA feels that even with enhanced recovery methods, the Saudi’s cant squeeze much more out of their declining Ghawar oil field, which supplies 60% of their production, and for the next few decades US production will increase due to our unconventional recovery techniques, notably fracking.

But we should note is that even if this temporary switch in world production leaders were to come to pass (and there are plenty of skeptics), this near energy independence will not lower our costs of gasoline for several reasons. The most obvious reason self sufficiency in energy wont lower prices is that crude oil is fungible and prices are determined by worldwide demand & supply. Moreover, the IEA figures include natural gas liquids in our expected production, which by 2011 had come to account for 28% our total unconventional production, & you cant produce gasoline from natural gas liquids. The other reason that domestic oil will of necessity stay high priced is the amount of continued investment that is needed to produce oil from shale.

The adjacent graph, which comes from a report from the N.Dakota Dept of Resources (pdf), shows the production over time from a typical well in the Bakken shale, which is now the most productive field in the US. What you see here is that unlike conventional oil wells, where you might drill one well that produces decently for 40 years, the typical bakken well production falls by over 80% in just two years, because after the initial oil flow from the pulverized rock, the flow slows to a trickle.

So to continue to produce oil from the bakken, or any other shale formation, you have to drill more & more wells, smash more bedrock, truck in millions of gallons more of water & chemicals, all of which is an ongoing capital drain. And even though we are expanding our capacity to tap shale oil considerably, the seven fold increase in oil drilling rigs in the US since 2009 has only produced about a 20% increase in oil production

Spencer on Petroleum Exports and US trade balances

Some of you may remember that last cycle I sometimes posted charts showing real exports and imports versus trend to show how trade was doing. It is now over two years since imports and exports bottomed so I thought It was time to update those charts for this cycle. But as I started looking at the data I made a very interesting discovery.

Real petroleum exports — both crude and refined product — are exploding. After being flat for years, petroleum exports have been growing at some 33% to 50% rates since 2006. They have leaped from about $2 B (2005 $) to over $5 B (2005 $). This is a significant development that few people have recognized.

To but this in perspective, petroleum exports had been a relative small factor in trade and the economy for years. For example from 1994 to 2005 petroleum exports had fallen from a sum equal to about 10% of petroleum imports to under 5%. But they now amount to almost a third of petroleum imports.

Consequently, when you look at US dependence on foreign oil it makes a big difference in the analysis if you just look at the data on gross imports or if you adjust the data to look at net petroleum imports — imports less exports. Gross imports show that since the last cyclical peak the combination of falling demand and even expanded domestic production over the last couple of years had produced a significant drop in real petroleum imports. I’ve long used oil imports as a measure of the US marginal demand for oil. This approach shows that real petroleum imports have fallen to their level of about ten years sago — a rather import ant development. But if you look at the net data, real petroleum imports are back to levels of 20 years ago. This shows that the US is making much more significant progress in reducing its dependence on foreign oil than is generally recognized.

This also has a significant impact on the US balance of trade. In recent months the real trade balance has appeared to be bottoming and this has been starting to get economists and analysts optimistic that trade could make a significant positive contribution to growth in coming quarters.

But the improvement has almost all stemmed from petroleum. The real trade balance excluding petroleum is still deteriorating, although maybe not as severely as it had been earlier in the cycle.

Moreover, if you look at real non-petroleum exports they appear to be rolling over. When I tried to do a trend analysis neither a linear or an exponential equation generated a good fit. I had to resort to a polynomial equation to get a good fit. But real non-petroleum exports shows significantly worse prospects for trade adding to growth in coming quarters that the consensus expects.