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Page added on January 20, 2014
Oil Glut Threatens US Shale Revolution
The year 2014 could pose a milestone for the U.S. oil industry. In its latest annual World Energy Outlook, the International Energy Agency predicted that the U.S. would become the world’s largest producer of oil by 2015, thus surpassing Russia and Saudi Arabia.
Comparably, the U.S. Energy Information Administration estimates that the U.S. will produce 9.6 million barrels of oil per day by 2016. In less than a decade, the shale revolution in the U.S. has reversed a four decade-old trend of increasing oil imports to become a major exporter by the end of this decade.
However, politics might get in the way of this remarkable development. With increased oil supplies coming from the newly discovered shale oil reservoirs, America is overwhelmed with abundant quantities of crude oil without the means to export it due to the 39-year-old-ban on exports of unprocessed oil products outside North America, introduced in the middle of the oil crisis in 1975. Currently, most U.S. shale oil is exported to Canada where it is sold at a higher price.
Because the U.S. has been the world’s largest importer of oil for decades, American refineries are predominantly fitted to refine the heavy lower-quality crude imported from Mexico, Venezuela and the Middle East rather than the sweet-light domestic crude. As a result, analysts are forecasting that by July 2014, the U.S. refineries will reach their limits to process excessive crude oil.
As the oil glut scenario looms, the pressure is rising on President Obama’s Administration and Congress to allow crude oil exports at the same time as a general debate on this issue is heating up. U.S. shale oil producers are therefore facing a tough dilemma. A continuous increase in oil production, coupled with the lack of political will to relax oil export laws, might bring a significant drop in domestic oil prices and could prove disastrous for the industry, already burdened with very narrow profit margins and fierce competition. Extracting oil from shale is an expensive business, and to be profitable, U.S. shale oil producers need the price of oil to stay above $80 to $90 a barrel.
The supporters of the oil exports ban are claiming that the U.S. is still importing around 40 percent of its oil consumption. Moreover, the key argument for the ban to stay in place is the need to protect the U.S. consumers with lower prices of oil, and the fact that the exports of refined products will bring more benefits for the U.S. oil industry and the economy. This trend is already gaining momentum as U.S. refineries have significantly increased the exports of refined oil products to Europe, South America and Asia.
In the most likely short-term scenario, U.S. authorities will have to react and ease export control mechanisms to prevent the negative consequences of the oil glut. In the longer term, oil imports will continue to fall as the U.S. oil production increases and U.S. refineries adapt their capacities to distil more domestic oil. With regard to oil prices for U.S. consumers, continuing the export ban will bring limited results, considering the high costs of shale oil production and the complexity of oil price mechanisms in global markets.
Regardless of the outcome, with the shale revolution blooming and energy self-sufficiency looming, the U.S. has a powerful new tool to actively influence global energy markets and retain its global geopolitical status.
Both Congress and the Obama Administration will have to establish the fine line between the need to protect consumers and U.S. strategic interests and efforts to sustain this new trend.
By Ante Batovic
9 Comments on "Oil Glut Threatens US Shale Revolution"
J-Gav on Mon, 20th Jan 2014 1:39 pm
True, especially if a global economic downturn hits, a temporary glut and a drop in price could result. But here I would advise a reversal of the old saying thus: “What comes down must go back up.” And it wouldn’t take many years for that to happen …
But gimme a break (that ain’t my neck) – “Regardless of the outcome, with the shale revolution blooming and energy self-sufficiency looming …” I guess the writer just liked the rhyme. I like rhymes too so I’ll give it a shot (concerning the situation in say, 3 or 4 years): “With the shale revolution blooping and energy independence pooping … etc.”
Davy, Hermann, MO on Mon, 20th Jan 2014 2:09 pm
“Only those with a wider sense of history or advanced critical thinking skills are able to avoid falling for the linear projection fallacy”. Need I say more?
robertinget on Mon, 20th Jan 2014 2:09 pm
“Politics get in the way” of what?
If we are in such an oil glut, why not
refill the SPR? Before getting all third world on us and exporting America’s future for short term gain.
What about US IMPORTS;
From EIA for week ending Jan 10, 2014:
U.S. crude oil imports averaged 6.9 million barrels per day last week,
down by 1.1 million barrels per day from the previous week. Over the last
four weeks, crude oil imports averaged 7.4 million barrels per day, 5.3%
below the same four-week period last year. Total motor gasoline imports
(including both finished gasoline and gasoline blending components)
last week averaged 405 thousand barrels per day. Distillate fuel imports
averaged 208 thousand barrels per day last week.
Down 5.3% from last year! Hoo friggin ray.
rockman on Mon, 20th Jan 2014 3:23 pm
Refill the SPR? Minor point: the SPR is filled to capacity. Also the laws governing SPR withdrawals are specifically designed to not allow the govt to affect the normal market placing pricing of oil. The SPR is designed to address oil availability problems…not pricing.
You’re so right about there being no glut if one defines a glut as there being more product available to purchase then there are buyers. Every oil producer today has a buyer for every bbl of oil they have to sell. They’ve sold their oil at the highest yearly average price during 2012 than ever before and yet there is still a buyer for every bbl of oil being produced.
Of course, if oil prices collapsed like they did in the mid 80’s there would be a lot of bbls with no buyers. But would that be good news for the world’s economies? Of course not if the reason for the price collapse is another major global recession that led to the 80’s price collapse. Oil selling for less the $20/bbl due to that glut was not a sign of good times. It was an indicator of serious economic problems. The world is buying more oil today at the current high prices then every before in history. The increase in oil production capacity has not produced a glut so far. There is no one projecting any significant increase beyond today’s volumes in the future. So the only obvious cause for a future glut would be another collapse of the global economy.
IIMHO the leaders of the world should be praying we don’t develop a “glut of oil” because it will mean major economic trouble for their countries. And that would include ever OPEC country. It would be similar to a person hoping they’ll develop cancer because they’ll finally be able to shed those extra pounds they’ve been carrying around.
But let’s imagine an excess of production capability beyond which there are no buyers. That doesn’t automatically translate to a “glut” or lower oil prices. A glut is when there aren’t enough buyers for the oil OFFERED to the market place. With the exception of the KSA all the oil exporters are currently selling every bbl the can produce. If the new shale trends in the US and elsewhere did add significant volumes to the global market the KSA wouldn’t have to reduce their price to maintain market share. For every bbl of “glut oil” they only need to withdraw one bbl of their oil from the market place. That would obviously mean a decrease in their cash flow. Which is exactly what they didn’t do in 1986 when they flooded the world with their oil.
But this isn’t 1986. The KSA oil income has increased from $60 billion/year to almost $350 billion/year in recent times. They could pull 10% of their production off the market to keep prices where they are today. So their income would drop to $315 billion/year…still 500%+ more than they were pulling in 10 years ago. Drop production 30% (almost 3 million bbl/day) and they would still be collecting 400% more than just 10 years ago. And at the same time keeping oil in the ground that will obviously have significant future value in a PO world. But it wouldn’t be a complete net loss in revenue: the KSA currently has hundreds of $billions earmarked for efforts to help maintain current production levels. Choke their wells back and at least some of those new projects can be delayed.
And folks should remember that every year the KSA is pulling an increasing amount of their oil from the global market place. Remember the ELM: Export Land Model…the internal consumption of their own oil. Consider the Chinese/KSA refinery JV on the Red Sea. That plant will crack 600,000 bopd. That’s 600,000 bopd of KSA oil. That’s 600,000 bopd of KSA oil that will be withdrawn from the market place the day that refinery goes on line. How many new Eagle Ford well will have to be drilled every year for the NEXT 30+ YEARS to just replace this oil let alone increase the net supply in the market place?
So again a glut isn’t defined as more oil production capability then buyers. It’s when there is more oil OFFERED for sale then there are buyers. And that offered volume appears to be completely in the control of the KSA. IMHO the Chinese, the KSA and a few others in the global market place are playing chess while those smiling over the prospect of an “oil glut” are playing checkers.
Northwest Resident on Mon, 20th Jan 2014 4:14 pm
What I can’t figure out is if the writer of this article is truly so disconnected from reality that he believes what he is writing, or if there is a purposeful intent to mislead — to misinform and manipulate public opinion in order to achieve a predetermined objective. I’m guessing that the writer is not as delusional as he appears to be, and that he is a paid propagandist for someone who would really, really like to export some oil and make a few more bucks than he might otherwise make.
rockman on Mon, 20th Jan 2014 6:43 pm
NR – I hate pulling out ulterior motives but I am also suspecting more hidden agenda’s behind some of these pieces. Yeah, I’m oil patch and been doing this for almost 4 decades. But much of what I post isn’t first hand knowledge but what I pull off the WWW And every writer has the same info available and probably a lot more time to search it then I do.
So why do so many constantly miss easy to document facts?
Northwest Resident on Mon, 20th Jan 2014 7:22 pm
rockman — Unlike you, who learned an honorable and fact-based profession — Geology, I spent four years learning the art of “public relations”, where among other things, I was taught how to sway public opinion by using “mass communications” (radio, tv, news, www, etc…). Like an attorney who learns in law school that a “fact” is only a “fact” if it can be established as a “fact” in the courtroom (despite that you and I and any normal person would immediately see it as a f’ing FACT) — I was taught by Harvard and Stanford professors that “the truth” is interpretive. In many assignments, we learned to put a “positive spin” on communications that were meant to persuade (some might say mislead). You get the picture. You speak of hating to pull out ulterior motives — but since I left college with my shiny 4-year-degree, ready to do max damage, I have seen the usage of “ulterior motives” (public relations generated propaganda) grow exponentially across all media types. We now live in a world where about 90% or more of what we get from “mainstream” media is partially or wholly twisted to achieve persuasive/propaganda goals — I mean god damn, even when they tell the truth they are doing it to achieve pre-determined goals. Articles like the one posted are most likely written by a PR guy sitting in a room taking “facts” from a “fact sheet” as provided by his corporate overlords, with his “job” description being “convince retail investors to keep their money in shale and tight-oil plays”. Without all the private investment — and I’m sure you realize this — the shale plays all go belly up — none of them are generating enough profit to stand on their own. Correct me if I am wrong. And what are the shale oil development projects these days but desperate end-of-the-line scraping of the bottom of the oil barrel? Gotta keep BAU going, for just a little while longer, it seems, and to do it, TPTB must lie lie lie. As in this article. End of Rant.
rockman on Mon, 20th Jan 2014 9:36 pm
NR – Interesting background: degreed “truth teller”. LOL. I’ve made the point many times before: some of the Eagle Ford players are making a profit at the well head…some are not. But that isn’t where the big money is being made. It’s a combination of the monies being made hyping the stocks of those players and the huge profits being made by the service companies who make the same margins whether the wells or big producers or non-commercial. I still contend that Petrohawk will prove to be one of the most profitable EFS players: they sold out their position in the play early on and walked away with $12 BILLION. And the Halliburton and Baker Hughes made huge profits when they could charge desperate operators any price they wanted. But guess what we’re starting to see now that there’s a little slow up: thousands of service company hands being laid off. We don’t see the hypsters pointing that out, do we?
The only good news for the public is that even if Eagle Ford wells don’t create much of a profit for the operators it still adds oil to the market place.
Makati1 on Tue, 21st Jan 2014 1:34 am
And why is the “market place” important?
I would see the end of oil, coal and natural gas happen today if I could. It wold stop the fantasy world we live in while there is still a real world left to live in. And, yes, I know that that scenario would be the end of most things the West takes for granted, and about time.
A billion plus deaths? Maybe, but mostly in the West where they are deserved. After all, the West has been plundering the rest of the world for centuries, maybe millenia. That is how they got the advantage, not by hard work but by plunder and death.
I know that the event mentioned above is coming anyway, but now would be better then in a decade or two when there is no drinkable water or breathable air or enough food to eat anywhere.