Move Over OPEC and Russia, America is in the Oil-Price Driver's Seat

fool.com ^ | May 18, 2014 | Tyler Crowe

[ckilmer]

Move Over OPEC and Russia, America is in the Oil-Price Driver's Seat

By Tyler Crowe |
May 18, 2014 |

The sun may be setting on OPEC dominance (Source: lalabell68 via pixabay.com).

Want to know something that you probably haven't considered, but will absolutely blow your mind?  Since 2011, two of the world's top 25 oil-exporting nations -- Libya and Sudan -- have seen production completely fall off a cliff, Export volumes from Venezuela and Mexico have been on a slow decline for a decade, and Russia and the West are in the midst of a Cold War-esque standoff over Ukraine. Yet over the last three years, the price of crude oil has not just stayed flat, it has declined. Step back and think about that for a minute. This was a market that used to go into panic mode if the king of Saudi Arabia had a bad meal, and now nearly 2 million barrels a day in production can vanish from the global market without anyone blinking an eye.

What has been the biggest factor in this change? American oil production. Since 2011, U.S. oil output has increased by nearly 3 million barrels per day and reduced the nation's dependence on the foreign markets to meet our energy needs. This production has brought an unprecedented level of stability to the global market and, even more miraculously, might actually have placed the United States in a more powerful position in the market than traditional powers such as OPEC and Russia. Let's look at why we are now in the leader position and what that means for American oil production over the next couple years.

The real price of oil
One of the biggest digs against shale production in the U.S. is that is more expensive than more traditional methods of getting at oil, which makes sense when you consider that these wells require long horizontal well lengths, large amounts of water, and massive pumping equipment to make it possible. The breakeven price for most of shale oil in the U.S. today ranges from $60 to $80 . When you combine that with production from other sources, many companies have reserve replacement costs well north of $50-$60, as shown in this chart from ConcoPhillips.

Source: ConocoPhillips Investor Presentation

Compare that to Saudi Arabia, where the lifting cost -- the total cost to physically take a barrel of oil from the well to market -- is below $5.

Those who fear this major price disparity point to the fact that OPEC's growing spare capacity and cost of production means the 12-nation coalition could simply turn on the tap, and then watch America's oil boom wilt on the vine as crude oil prices drop. This is certainly possible in theory, as Saudi Arabia and other large OPEC nations have massive oil reserves, as well as spare capacity. The major element that is missing from that idea, though, is the how much that barrel of oil needs to cost to fund the country. 

Major oil-exporting nations such as Saudi Arabia and Russia are incredibly reliant on oil royalties, taxes, and fees to fund the federal government. Saudi Arabia, for example, has rather lavish social programs and imposes marginal taxes on its citizens thanks to oil subsidies. The problem is, the true breakeven cost -- the price of a barrel of oil needed to bring it to market and balance country budgets -- is becoming extremely high for these nations. 

Country	Budget Breakeven Price for Oil (USD)
Saudi Arabia	$87.63
Russia	$117.80
Iraq	$92.96
Iran	$143.00
Libya	$99.60

Source: Bloomberg.

So let's say Saudi Arabia turns on the taps to send oil prices plummeting by $20-$25 from today's Brent crude price of $110 per barrel. While profit margins in America may get squeezed and production growth may slow a bit, just about every U.S.-based driller could still generate a return on a barrel of oil. At the same time, it would make life absolutely miserable for OPEC nations and Russia. A $10 drop in the price of oil today would result in an annual contraction of the Russian economy of 1%.

As long as American oil companies can withstand oil prices lower then the rest of the world, we have a much stronger competitive position in the global market.  Also, that major dip in prices is less and less likely to happen because other oil-producing nations are more dependent on high prices than the United States.

This situation will this allow the U.S. to bring on an additional 1.6 million barrels of oil per day between now and 2020, as projected by the U.S. Energy Information Administration, it also could lead to something that we haven't done in years -- export oil.

What a Fool believes
For the next 10 years or so, America will likely be the stabilizing factor in the global oil markets because its cheap, reliable oil supply can help offset major production disruptions elsewhere, or even displace some of these more expensive oil sources. Is this a sustainable position? Probably not. According to the Energy Information Administration, after 2020 oil production in the U.S. is expected to slip again as shale output starts to decline. Also, Saudi Arabia is sitting on vast quantities of oil that will likely be in greater need 10-15 years from now than today.

[chajin]

We are going to find more shale deposits, as will Canada, and the Alaskan and Gulf of Mexico deposits are still waiting to be fully tapped: we can be in the driver’s seat for the next two generations at least, all it takes is a government that doesn’t get in the way—cf. “Cruz.”

P.S. It just occurred to me that the Biblical widow in Elijah’s day had a cruse of oil that never ran out; if we had a Cruz, our oil wouldn’t run out either...

[Oldexpat]

The US is still going to tap into our known oil deposits in AK and on the East and West Coast to maintain our production. This will require some political changes.
The GOP needs to make the case and spell out to the LIV’S how much the RAT policies are costing at the pump.
I still don’t believe in peak oil..there is still a lot of oil in the ground after current techniques are employed. There will be more advances in technology.

[SkyDancer]

Right - but we’re using OPEC’s pricing schedule.

[DesertRhino]

I agree about making the case that leftist policies are costing us at the pump and showing people that. But how do you make that case when Obama has already said his stated goal is to raise our prices to Euro levels, and that the only issue he had with high prices is that they went up too quickly?

Even more hopeless is that if an inexhaustible supply, exceeding all our needs could be found and could all come from on oilfield in a Houston industrial park. These nuts believe that burning oil is going to cause Manhatten and Miami and DC to be under 20 feet of water.

They simply don’t want us using oil. That matters to them even more than the source. And they are successfully brainwashing a generation of children.

[chajin]

But how do you make that case when Obama has already said his stated goal is to raise our prices to Euro levels, and that the only issue he had with high prices is that they went up too quickly?

It occurred to me, when I read this, that the Democrat coalition is of the very rich and the underclass. The very rich don't mind paying European/Japanese prices for gasoline, and the underclass in urban areas either drive very little or not at all, so they do not care about the price of gasoline, so there is no self-interested incentive to lower oil prices among Democrats in general.

[familyop]

From the U.S. Energy Information Administration
"In December 2012, the U.S. produced about 7.03 million barrels of crude oil per day and imported about 7.58 million barrels per day...The U.S. became a (slight) net exporter (exported more than we imported) of refined petroleum products in 2008. Refined petroleum products produced in the U.S. from both domestic and imported crude oil are exported to other countries."

Thanks to trade deficits and our declining economy, we no longer use as much. Notice also, the likely more recent, steeper decline in our domestic oil consumption. We're consuming a little less than 19 million barrels per day.

[familyop]

U.S. Imports from Canada of Crude Oil and Petroleum Products ... - EIA
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUSCA1&f=M

[familyop]

Chinese Company Is Quietly Building Natural Gas Fueling Stations Across The US

China's Building U.S. Natural Gas Infrastructure

[GGpaX4DumpedTea]

“These nuts believe that burning oil is going to cause Manhatten and Miami and DC to be under 20 feet of water.”

Oh my...we all need to get on our knees and pray that this be so! And maybe we can get SF and LA under 20 ft of water too!

[ckilmer]

For the next 10 years or so, America will likely be the stabilizing factor in the global oil markets because its cheap, reliable oil supply can help offset major production disruptions elsewhere, or even displace some of these more expensive oil sources. Is this a sustainable position? Probably not. According to the Energy Information Administration, after 2020 oil production in the U.S. is expected to slip again as shale output starts to decline. Also, Saudi Arabia is sitting on vast quantities of oil that will likely be in greater need 10-15 years from now than today.
....................
Disagree here on three points. First,imho US oil production will likely peak out much further north 9.6 million barrels a day—than the EIA predicts. Their prediction is based on the slope Eagle Ford and Baaken production increases flat lining by the end of 2015. Something I don’t disagree with. However, much of the new drilling is taking place in the permian basin where reserves ten times larger than the baaken and eagle ford combined. The slope of production increases in the permian basin has been relatively flat. But sometime next year that slope is going to go parabolic in much the same way that the baaken and eagle ford have been for the last 3 years. There will be as many as five years where the permian basin will enjoy 500k -1 million barrel @ day oil production increases.

I think that EIA is also wrong about sliding US production after 2020. When it comes—it won’t be because of diminished supplies. If anything, US supplies will increase as long as oil prices are north of $90@barrel. Further they are much higher than the EIA’s numbers already. What will slow US production is falling oil prices.

Falling oil prices will come after 2020 because of slowing demand increases and rising supply.

After 2020 or so, an increasing number of countries will have learned to frack which will raise production but also competition from competing transportation fuels like natural gas trains trucks and buses plus electric cars and fuel economy will start to put an crimp on demand. Chevron I think put out a chart a couple months back. They estimated that demand for oil would not peak until 2030. So 2020-2030 will be a transitional period.

Anyhow that’s my WAG.

[familyop]

From the U.S. Energy Information Administration:
"In 2013, the United States consumed a total of 6.89 billion barrels of petroleum products, an average of 18.89 million barrels per day."

"The U.S. imported approximately 10.6 million barrels per day of petroleum in 2012 from about 80 countries. We exported 3.2 MMbd of crude oil and petroleum products, resulting in net imports (imports minus exports) equaling 7.4 MMbd. Net imports accounted for 40% of the petroleum consumed in the United States, the lowest annual average since 1991. "Petroleum" includes crude oil and refined petroleum products like gasoline, and biofuels like ethanol and biodiesel. In 2012, about 80% of gross petroleum imports were crude oil, and about 57% of all crude oil that was processed in U.S. refineries was imported. The top five source countries of U.S. petroleum imports in 2012 were Canada, Mexico, Saudi Arabia, Venezuela, and Russia."

[familyop]

Some say this. Some say that. We’ll see.

Bakken Formation
http://www.snopes.com/politics/gasoline/bakken.asp

400-Billion Barrel Bakken Oil Field a ‘Myth’, says USGS
http://politicalbyline.com/2008/06/400-billion-barrel-bakken-oil-field-a-myth-says-usgs/

Huge Bakken Oil Field A Myth
http://jbscorner.blogspot.com/2008/06/huge-bakken-oil-field-myth.html

[familyop]

"These nuts believe that burning oil is going to cause Manhatten and Miami and DC to be under 20 feet of water.

They simply don’t want us using oil."

True, or they have interests opposed to harvesting much oil. For one, many of the alternative energy companies (tax credit and other subsidy leeches) have regulated against more honest efforts (e.g., people building their own less expensive heating systems that yield more BTUs per dollar spent).

I suspect that they also push against oil interests for higher prices. Many of them might even be invested in local energy companies around the country (higher prices equal bigger returns).

[Ben Ficklin]

"costing us at the pump and showing people that"

You can't show people that because the cost of gasoline in the US is relatively cheap.

If you compare gas prices in the US relative to other nations, we come in at #44 of 55. Norway is #1

If you compare these gas prices as a percent of average income, we come in at #50 of 55 and India is #1. If your income is below average it would be higher but if your income is above average it would be lower.

Source

You can find many such lists on the internet. This one is a couple of years old but the list is in descending order, is priced by the gallon rather than by the liter, and also shows the "pain at the pump" price.

[ckilmer]

The baaken (which includes three lower levels of the three forks formation) has something like 500 billion barrels of oil IN PLACE. “In place” is the way the oil industry describes total oil underground. However, only about 35 billion barrels of that oil is RECOVERABLE using current technology and at current prices. If the price falls then less oil is RECOVERABLE. If the price rises or the technology improves then more oil is recoverable.

[ckilmer]

Bakken Formation
http://www.snopes.com/politics/gasoline/bakken.asp

400-Billion Barrel Bakken Oil Field a ‘Myth’, says USGS
http://politicalbyline.com/2008/06/400-billion-barrel-bakken-oil-field-a-myth-says-usgs/

Huge Bakken Oil Field A Myth
http://jbscorner.blogspot.com/2008/06/huge-bakken-oil-field-myth.html
..............

notice the date on these estimates. 2008.
the shale gas revolution had barely got off the ground in 2008 and the shale oil revolution was still in the wings.

In both cases recoverable reserves have steadily gone up every year.

[ckilmer]

“The U.S. imported approximately 10.6 million barrels per day of petroleum in 2012 from about 80 countries. We exported 3.2 MMbd of crude oil and petroleum products, resulting in net imports (imports minus exports) equaling 7.4 MMbd.
.................
Here is an EIA graph of net imports of crude oil and petroleum products that runs through january 2014. in January 2014 net imports of of crude oil and petroleum products were 5.54 MMbd
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mttntus2&f=m

So net imports are falling fast—or roughly 1 million barrels a year between 2012 and 2014. The EIA expects oil production rises of each and all of 2014 and 2015 to be at about 1 million barrels a year. http://www.eia.gov/forecasts/steo/archives/May14.pdf

The EIA also expects production increases to flatten out after 2015. But I think steep production rises will occur for a couple more years because of the enormous recoverable reserves in the Permian basin have barely begun to be tapped. Most of the new drilling is occurring in the permian basin. Sometime next year imho production increases from the permian basin will go parabolic as they have for the last three years in the baaken and the eagle ford. So that just as the eagle ford and baaken production increases start to flat line —the permian basin production numbers will explode.

[familyop]

Thank you very much. Very informative! Maybe oil prices will ride long enough to keep the good work going and pay investors well. It’s likely that other countries will continue to add more vehicles/drivers and other consumers. The new demand is not all bad. We just need to make a few improvements to live better with the changes in energy markets.

One good, small change would be that of repealing regulations that favor subsidized alternative energy interests and seek to rob do-it-yourself-ers and small contractors who make superior, low temperature, no-pressure and cleaner burning components for small heating systems. There are no public utilities near me, so some experimentation has been done here. I can link to examples, if you have any interest in such systems.

[familyop]

Interesting. I’ll look up some information on the Permian basin. By the way, I’m in an area on the Rockies, where bipartisan NIMBYs and crooks chased away some good natural gas and uranium exploration projects. Disgusting. They were informed that the projects wouldn’t hurt groundwater, but they refuse such projects on the irrational basis of possible associations between any known existance of proposed projects and the local, mythical property values and tourism.