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From Crude to Shale: What’s Next for the American Oil Industry

November 26, 2014
When the BW Zambesi oil tanker departed from Galveston, Texas on July 30, 2014, it marked a historic turning point for the American oil industry, signifying a new era in U.S. energy relations with the rest of the world.  Loaded with 400,000 barrels of American crude oil, the tanker destined for South Korea represented “the first unrestricted export of American oil to a country outside of North America in nearly four decades.”[1]

By David Kolansky, C’16

Historically, the United States has maintained a strict policy of limited oil exports since the Arab oil embargo under President Jimmy Carter and following the Iranian Revolution in 1979.[2]  Since then, various administrations have permitted limited exports, including recent oil and natural gas shipments from Alaska’s Cook Inlet.  However, the likelihood of large-scale American oil exports was trivial because the country was keen in utilizing its own supply of oil.

So how did the U.S. oil industry get to where it is today?

For decades, economists and politicians have believed it unlikely that the United States could one day be a major exporter of oil.  In 2008, President George W. Bush declared that the United States was “addicted” to imported oil from unstable or unfriendly countries.[3]  Domestic oil production had been in free fall for decades as repeated presidential promises of “energy independence” echoed hollowly.  But over the last decade there developed a frenzy of drilling in shale oil and gas fields across the country, made popular by the rampant increase in hydraulic fracturing, or fracking, to crack oil-saturated shale.  This rise in hydraulic fracturing has led to a reduction in crude oil and petroleum imports from foreign countries.  In 2013 the U.S. imported just 33% of its total petroleum consumption, the lowest mark since 1985.[4]

Due to these developments, it comes as no surprise that an energy milestone was reached this past July: U.S. daily crude oil production topped 8.5 million barrels per day for the first time in nearly 30 years (July, 1986).  And thanks to America’s shale oil revolution, since July 2011 refineries have added more than 3 million barrels of oil per day to the domestic oil supply.[5]

Over the last six years, domestic oil production has increased by more than 70 percent to roughly 8.5 million bpd in the summer of 2014.  Furthermore, imports from the Organization of the Petroleum Exporting Countries (OPEC) have been cut roughly in half.[6]  With domestic oil production growing steadily month by month, many oil experts predict that the country’s output will rise to as much as 12 million barrels a day over the next decade, allowing the country’s supply of oil to rival its other current surplus of natural gas.[7]

Oil experts also recognize the growing gap that exists between the type of oil that the country now produces and the type of oil its refineries were designed to process.  For example, shale oil is predominately light, sweet oil that is low in sulfur content and flows freely at room temperature.  Yet American refineries face a limit as to how much shale they can efficiently refine, as they were designed to process much heavier crude oils imported from Mexico, Venezuela and Canada.  This challenge, together with a growing volume of domestic crude oil, has compelled oil companies to lobby for expanded exports and directly led to the recent shipment from Galveston.

The impact of increasing oil exports on consumers

Increasing petroleum exports remains a highly contentious issue, particularly because of the potential impact on consumers.  Independent refineries have argued that increasing exports could directly lead to more expensive domestic oil for them, which in turn could mean higher oil and gas prices for American consumers.

Oil companies, and many independent economists, argue just the opposite: since American exports would augment global supply levels it would thus lower international oil benchmark prices, which ultimately determine the rise and fall of American gasoline prices.  With tense Russia-European relations and turmoil in the Middle East, it is obvious that western allies would be happy to have a dependable supplier of oil.  The Energy Department has begun a major study on the merits of exports and how they would affect American consumers and United States energy security.  Their previous study on gas exports backed the industry position that promoted natural gas exports, despite environmental opposition to drilling and fracking.[8]

Policy implications for U.S. energy security

The rapidly increasing discoveries of light crude oil are outpacing the capacity of American refineries to process it, thus spurring new thinking concerning oil exports among individuals in Washington.  At a New York energy conference last December, Energy Secretary Ernest Moniz offered that it may be time for the administration to reconsider the export ban, and argued that today’s “energy world is no longer like the 1970s.”[9]

The first steps toward a revamped energy policy came in June when the Commerce Department approved applications from two Texas energy companies, Pioneer Natural Resources and Enterprise Products Partners, to export ultralight liquid hydrocarbons known as condensates.[10]  Condensates are typically considered to be crude oil despite the fact that they share qualities of both oil and natural gas and are usually found in gas form beneath the earth.  Congress ruled that since the companies had minimally processed the condensates and made them safe for transport, the result sufficiently characterized a refined fuel product.[11]

The Obama administration has said that the decision does not infringe on U.S. crude oil trade limits since refined gasoline and diesel products are legal to export. Nevertheless, oil companies and many Wall Street executives interpreted the move as being a fundamental shift in U.S. energy and trade policy in support of some exporting of oil.

In addition, the U.S. moved one step closer to energy independence last year, when for the first time since 1995, domestic oil production exceeded U.S. net imports.[12]  Due in part to the latest boom in hydraulic fracturing, the U.S. is increasingly producing more crude oil and reducing foreign import dependency.

While the politics of loosening such an export ban remain complex, potential economic growth and prosperity for U.S. consumers, as well as novel U.S. energy relations with the rest of the world, may loom in the future.  For now though, such a possibility may have to wait until the 2016 presidential election campaign, when it is sure to be a hot-topic policy issue for candidates and voters alike.

Charts

Figure 1: Top 4 countries from which the United States imports oil[13]

**According to the U.S. Energy Information Administration, of the 7.7 million barrels per day of crude oil imported in 2013, 3.5 million bpd (45% of the total) came from OPEC countries. Saudi Arabia was our largest OPEC supplier at 1.3 million bpd (17% of the crude import total). The U.S.’ biggest supplier of crude continues to be Canada with 2.6 million bpd of crude, roughly one third of total crude oil imports in 2013, and that number is likely to rise with the approval and expansion of the Keystone XL Pipeline that would bring crude oil from Alberta, Canada to Port Arthur, Texas.

Figure 2: Domestic crude oil production and U.S. imports[14]

**The United States moved one step closer to energy independence last year when – for the first time in nearly two decades – it produced more crude oil than it imported.  In October 2014, the U.S. surpassed the benchmark of 8.5 million barrels per day of crude oil.[15]


[1] “In the U.S. a Turning Point in the Flow of Oil,” New York Times, October 7, 2014, http://www.nytimes.com/2014/10/08/business/energy-environment/reversing-the-flow-of-oil-.html?_r=0.

[2] “1979 Energy Crisis,” Wikipedia Encyclopedia, http://en.wikipedia.org/wiki/1979_energy_crisis.

[3] “In the U.S. a Turning Point in the Flow of Oil,” New York Times.

[4] U.S. Energy Information Administration, http://www.eia.gov/tools/faqs/faq.cfm?id=32&t=6.

[6] “In the U.S. a Turning Point in the Flow of Oil,” New York Times.

[7] “In the U.S. a Turning Point in the Flow of Oil,” New York Times.

[8] “Liquefied Natural Gas Export Study,” U.S. Department of Energy, http://energy.gov/fe/services/natural-gas-regulation/lng-export-study.

[9] “In the U.S. a Turning Point in the Flow of Oil,” New York Times.

[10] “Oil-Export Prospect Fuels Conference,” The Wall Street Journal, July 14, 2014, http://online.wsj.com/articles/energy-industry-presses-for-oil-export-ruling-expansion-1405380204.

[11] “Oil-Export Prospect Fuels Conference,” The Wall Street Journal.

[12] “Big milestone: U.S. producing more oil than it imports,” USA Today, November 13, 2013,http://www.usatoday.com/story/news/nation/2013/11/13/us-oil-production-exceeds-imports/3518245/.

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