The Phantasm

I think that a lot of people are making more of this story:

The U.S. will become the world’s top producer of oil within five years, a net exporter of the fuel around 2030 and nearly self-sufficient in energy by 2035, according to a new report from the International Energy Agency.

It’s a bold set of predictions for a nation that currently imports some 20% of its energy needs.

Recently, however, an “energy renaissance” in the U.S. has caused a boost in oil, shale gas and bio-energy production due to new technologies such as hydraulic fracturing, or fracking. Fuel efficiency has improved in the transportation sector. The clean energy industry has seen an influx of solar and wind efforts.

By 2015, U.S. oil production is expected to rise to 10 million barrels per day before increasing to 11.1 million bpd by 2020, overtaking second-place Russia and front-runner Saudi Arabia. The U.S. will export more oil than it brings into the country in 2030.

Around the same time, however, Saudi Arabia will be producing some 11.4 million bpd of oil, outpacing the 10.2 million from the U.S. In 2035, U.S. production will slip to 9.2 million bpd, far behind the Middle Eastern nation’s 12.3 million bpd. Iraq will exceed Russia to become the world’s second largest oil exporter.

than it deserves and drawing some unwarranted conclusions.

The country that effectively sets the price of oil isn’t the country that produces the most. It’s the country that can ship in volume with the lowest cost of production. Unless U. S. production is able to undercut the cost of Saudi production producing more won’t make a great deal of difference except to the companies that are drilling and pumping it.

The $64 billion dollar question is how much oil the Saudis will be able to ship in 2020. Not only is their production slowing but they’re consuming an increasing proportion of their own oil themselves, at least in part due to consumer subsidies.

Update

Ben Casselman explains in more detail (and from a slightly different perspective):

Why doesn’t more production mean lower prices? Two reasons: supply and demand.

Oil is a global commodity. What matters for prices is total supply and total demand — not where the oil is produced or consumed. That means that even if the U.S. relied only on domestically produced oil, prices would still be dictated by global market forces.

In terms of supply, politicians tend to distinguish between foreign and domestic oil. But for prices, a different distinction is more important: OPEC and non-OPEC.

OPEC is a cartel, meaning its members collude to try to keep prices high. When prices start to fall, OPEC countries agree to cut back on production in order limit global oil supplies, pushing prices back up. Higher prices, however, induce more drilling in countries outside of OPEC, such as the U.S., which limits OPEC’s influence. The more of the world’s production that comes from outside of OPEC’s clutches, the harder it is for the cartel to control prices.

Increased domestic oil production, then, matters mostly because it adds to non-OPEC oil supply. The trouble is that even as the U.S. is pumping more oil, many other countries are pumping less. The IEA expects a surge in non-OPEC production this decade due to newly tapped deep-water and shale resources in the U.S., Canada and Brazil, but after that the world will rely increasingly on oil from OPEC countries, especially Iraq.

The other half of the equation is demand. The U.S. and other western countries are using less oil due to improved fuel efficiency, increased use of renewable fuels and other factors. But soaring demand in China and other developing countries more than offsets that decline. The IEA expects global oil demand to hit 99.7 million barrels per day in 2035, up from 87.4 million barrels per day in 2011.

If the IEA is right, the equation is simple: More demand plus less (non-OPEC) supply equals higher prices. But higher prices aren’t inevitable. Under an alternative scenario looked at by the IEA in which countries adopt policies to limit consumption of oil and other fossil fuels, prices would stay flat or even fall over the next two decades.

All of this must be terribly disappointing to the “peak oil” folks.

Update 2

The big loser in increased oil production particularly increased U. S. production is Iran. Iran is the highest-cost producer of the major oil-producing and exporting countries countries, so high that oil must be priced at $150 a barrel for them to make money. Oil at $85 per barrel, as it is now, is ruinous to them. The Iranians have been banking on increased worldwide demand and decreased supply driving prices higher. And they’re in desperate need of capital improvements in their oil sector, something that’s been made increasingly difficult by the various sanctions imposed on them. As I’ve been saying for some time Iran’s nuclear program doesn’t really make financial sense as an energy program—they lose more energy by venting natural gas from their oil wells than they’ll produce with their nuclear power stations.

10 comments… add one

  • jan

    According to this piece there is a two-in-one benefit derived from the new techniques implemented in the “energy renaissance.” The first deals with more expedient ways to access energy sources. The second is To fight climate change,

    What has actually succeeded in reducing CO2 emissions? Fracking. Specifically, fracking in the United States, which has made the U.S. the world’s leader in reducing CO2.

    Who would have thunk?

  • Oil is a global commodity. What matters for prices is total supply and total demand — not where the oil is produced or consumed.

    I don’t get why this is such a hard concept. I hear people all the time say, “If we pumped our own oil we could have lower prices!” Sure, if we want the government setting the price of oil/gasoline. Yet there is nothing from stopping the government from doing that right now.

    Under an alternative scenario looked at by the IEA in which countries adopt policies to limit consumption of oil and other fossil fuels, prices would stay flat or even fall over the next two decades.

    And the simple and possibly the most sensible policy along these lines would be….yes….you know what I’m going to say…a pigovian tax on gasoline/oil.

    1. We could use it to replace the current wage tax supporting Social Security and Medicare–after all we want less oil consumption not less labor, right?

    2. It would probably be welfare enhancing for the lower incomes–low income people have transportation options….you don’t have too many options with regards to working/not working (look steve’s head just blew up).

    3. Environmental benefits–even if you doubt global warming (I don’t) a pigovian tax would still help with other pollution probelms associated with oil consumption.

    Of course….sensible and simple means it will never ever happen. But I’m sure we’ll get it right some day, right steve?

  • low income people have transportation options

    I don’t know what it’s like where you or steve are but around here they don’t. Due to the lack (remarkably, the decline) in low cost housing other than in the inner city in Chicago poor people are increasingly doing what’s called “reverse commuting”, i.e. they live in the city and commute out of town to work. The distances and the availability of public transportation are such that driving is the only alternative.

  • Basically, what’s happened in Chicago over the last 30 years is that most people with any money have moved into the suburbs, they’ve bulldozed the small amount of low cost housing in the suburbs because they don’t want to live around poor people and to make room for higher-priced housing, and public transportation from the city to the suburbs is inadequate.

  • I don’t know what it’s like where you or steve are but around here they don’t. Due to the lack (remarkably, the decline) in low cost housing other than in the inner city in Chicago poor people are increasingly doing what’s called “reverse commuting”, i.e. they live in the city and commute out of town to work.

    Isn’t that an option?

    Look, when it comes to work…you don’t have much in the way of options. Very few have the option between working and not working. Commuting on the other hand can be tackled a number of ways, some more convenient than others obviously.

    BTW, I’d think that Southern California is probably even worse than where you live in terms of commuting/transportation.

  • Isn’t that an option Dave? Besides by options I don’t mean it has to be drive or public transportation. Car pooling is another option. Getting a more fuel efficient car is yet another. Reducing non-work related driving is yet a third.

  • jan
  • PD Shaw

    Jevons in the Coal Question sort of hand-waived off the notion of taxing coal for home consumptive use as a means of stretching out the duration of coal. He thought it was a political non-starter, which is interesting given Great Britain is not conventionally considered a democracy in 1865. But he was envisioning one of the most crucial necessities of life being rationed by a tax, which would have to be high enough to alter behavior.

  • Drew

    “Basically, what’s happened in Chicago over the last 30 years is that most people with any money have moved into the suburbs, they’ve bulldozed the small amount of low cost housing in the suburbs because they don’t want to live around poor people and to make room for higher-priced housing, and public transportation from the city to the suburbs is inadequate.”

    I can only speak about Naperville. (For those not from the area, its sort of one of those “top 10 greatest places to live in America” magazine articles) In fact, low income housing has proliferated. It created the mother of all battles for construction of a new high school (Dave: Matea) because Section 8-ers would go to proposed high school location A but not location B. People are moving to south Naperville and the tear down boom in central Naperville is rejuvenated because low income housing and its attendant problems have infiltrated west and north Naperville/Warrenville. It was all driven by the destruction of inner city projects and the relocation to the burbs.

    I can’t imagine similar things aren’t happening all over.

  • I can’t imagine similar things aren’t happening all over.

    Certainly not in Cook County (Naperville is in Dupage). The last bit of affordable housing on the North Shore was bulldozed a few years back–a row of SROs and the like on Skokie Blvd.

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