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.
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.
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.