We Can't Take Our Energy Security for Granted
Posted March 17, 2021
One of the great benefits of increased U.S. oil production over the past decade and a half is strengthened U.S. energy security – decreased reliance on foreign oil suppliers and insulation for American consumers against sudden price increases due to geopolitical events, such as the recent attacks on Persian Gulf oil facilities.
Years ago, an episode like that could’ve caused serious alarm in the United States and globally. Yet, the apparent lack of significant or enduring oil price movement following last weekend’s attack shows the tremendous influence U.S. oil production has had on global markets. The same was true after missile attacks on Saudi facilities in 2019 (see here), which substantially reduced Saudi Arabia’s oil exports for a short period. Both events and their aftermath indicate that U.S. domestic production has largely mitigated the price volatility historically associated with serious geopolitical events.
Still, some cautions are in order.
First, U.S. energy security can’t be assumed. It takes long-range planning and investments, safe access to domestic resources, the ability to expand pipeline and export facility infrastructure, and a policy-level approach that anticipates unforeseen events that could affect global energy supply and have dire impacts on U.S. security, economic growth, and consumers.
The second stems from the first: The U.S. should not unilaterally constrict domestic production, as the Biden administration has suggested it might do with its decision to halt new federal natural gas and oil leasing, onshore and offshore. In 2019, more than a fifth of U.S. oil production came from areas under federal control, according to federal data. The administration’s move on leasing is one that could have significant consequences down the road.
U.S. oil production has grown and contributed toward greater energy self-sufficiency over the past decade. As a result, global oil prices and U.S. petroleum imports fell, while U.S. exports rose for crude oil, refined products, petrochemicals and other manufactured goods that were advantaged by cost-effective domestic energy.
Price volatility historically has been synonymous with consumers’ concerns for sudden price spikes and sensitivities to Middle East political developments. Technically, however, volatility is a measure of absolute change – that is, prices having gone up or down. With sharp oil price decreases in 2015-2016 and even more so again last year, measures of volatility rose but actually benefitted consumers, since the increased volatility reflected prices at historically low levels.
Notably, the main causes of shocks differed between these periods. In 2015-2016, the shock was a sudden OPEC supply increase and effort to regain market share that had been lost to U.S. producers. By contrast, last year’s shock began with similar OPEC actions to flood the global market but was predominantly driven by the dramatic demand reduction due to COVID-19. A common thread through both periods was that U.S. domestic production served and helped insulate consumers, mitigating historical concerns about price volatility and the assured supplies associated with the geopolitics of oil.
However, the strength and longevity of the cushion afforded by U.S. domestic oil production could shift relatively quickly. We saw some evidence of this in API’s recent primary data on U.S. petroleum markets.
First, the 2020 COVID-19 recession dealt a setback to the progress that U.S. refiners made with strong capacity utilization rates over 90% in 2019 that are expected by EIA to recover gradually this year and the next. U.S. refiners prospered in part because of their high efficiency, productivity and scale economies, but also due to the fact that domestic crude oil production was ample and cost-effective.
Monthly U.S. crude oil production reached as high as 12.9 million barrels per day (mb/d) in November 2019 and fell to 10.0 mb/d just six months later. With less drilling activity, recent U.S, crude oil production has ranged between 10.0 mb/d and 11.0 mb/d, and this lower production has in turn contributed both to lower U.S. petroleum exports as well as ultimately higher prices. In fact, the U.S, Energy Information Administration’s (EIA) outlook anticipates weaker domestic crude oil production will correspond with a return to the U.S. being a petroleum net importer beginning next quarter.
With less U.S. crude oil production coupled with output restraint by OPEC and Russia, international Brent crude oil prices have risen by nearly 33% year-to-date through March 9. And crude oil futures prices for delivery up to one year ahead have increased to over $60 per barrel – their highest levels in nearly two years.
As crude oil prices have risen, the tone of the conversation about the geopolitics of oil has also begun to shift with White House concern over escalating attacks on Saudi Arabia and realizations that the global oil industry – including major public and private companies as well as national oil companies – appear not to have been able to invest at the pace needed to replace their oil reserves.
Specifically, as Bloomberg refers to the optimal state as a “Perfect 10” – that is , companies investing to maintain oil reserves equal to at least 10 years of production at current rates – for major oil companies and in the U.S. as a whole this ratio has rarely dropped below 10 years. When this ratio of reserves to production has fallen below 10 years, historically it has been associated with major market disruptions.
Bloomberg also identifies global oil majors and national oil companies that currently have fewer than 10 years’ worth of proved oil reserves and suggests that these points towards a potential oil shortage and consequently elevated prices.
Moreover, with global oil demand growth having recently outpaced that of supply per API’s Monthly Statistical Report™ and the EIA, tighter oil supplies appear possible as soon as next year, as we discussed in this article.
In short, unexpected developments could put further upward pressure on prices, and with already-reduced U.S. oil production and growing concerns about prospective oil reserves this is no time for the U.S. to commit the unforced error of constricting its domestic production.
While API can’t speculate on prices, we can clearly see how abundant U.S. production has helped protect U.S. consumers from price spikes due to myriad supply interruptions, restrictions and geopolitical concerns over the past several years.
The U.S. has the resources, technology, infrastructure and markets to determine its own destiny. Sound U.S. energy policies are the key to drive the outcomes, aid consumers, and reinforce U.S. energy security in the process.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.