Dissecting the American Oil Boom
On October 23rd the Associated Press wrote an article detailing the recent U.S. oil output surge. In particular the article notes that the Energy Department predicts that American production of crude and other liquid hydrocarbons (including biofuels), will average 11.4 million barrels per day next year. This is slightly shy of Saudi Arabia’s 11.6 million barrels output, but by 2020 the U.S. output is forecasted to grow to potentially 13 to 15 million barrels per day.
The big headline is that the United States has the potential to overtake Saudi Arabia as the world’s largest producer. Recently, the IEA released their World Energy Outlook 2012, detailing energy projections up until 2035. In this report, the IEA predicted that the U.S. would temporarily overcome Saudi Arabia and become the world’s number one oil producer by 2017. It also projected that by 2035 the U.S. would be largely energy self-sufficient. This is in itself is not news, and builds upon previous forecasts – Citi GPS’s March, 2012 forecast and the EIA’s January, 2012 Early Release Annual Energy Outlook, – that have already been dissected by the media. What is worth examining is what this claim might mean for the United States.
To begin, the driving forces behind the U.S. oil boom are two techniques called hydraulic fracturing (fracking) and horizontal drilling. Fracking is the use of hydraulic pressure (pumping sand, water, or chemicals) to crack open rocks, while horizontal drilling is the process of drilling a well horizontally to more efficiently drain long reservoirs. Although horizontal drilling has been a method for some time, new innovations in technology have made it much more profitable. These two techniques allow drillers to obtain oil and natural gas from previously unconsidered reserves.
Hydraulic Fracking was used as early as 1947 to stimulate shallow, hard rock oil and gas wells. In order for an oil or gas well to be productive, it must be drilled into a porous and permeable rock, such as sandstone. Shale is more porous than sandstone but it has an extremely low permeability, making earlier shale gas ventures unprofitable. After 40 years of research and innovations, the current method, called horizontal slickwater fracking, debuted on the Barnett Shale in Texas in 1998. Since its debut, the development of shale wells has taken off. Between 2000 and 2010, the number of natural gas wells increased by 49% in the USA (from 342,000 natural gas wells to more than 510,000).
The potential economic benefits of the surge in U.S. production cannot be overlooked. Citigroup estimates that in North America more than 550,000 new jobs could be created directly in the oil and gas sectors by 2020. Alongside this, the extra boost to the economy from the new production could result in roughly 2.2 million new jobs in the broader North American economy. Natural gas production could shrink the current account to only $24 billion by 2020.
While the newfound oil abundance will cut down on America’s oil imports, we will still remain linked to the global market. Americans use 18.7 million barrels of oil per day, which means the U.S. will still import oil, and our production is forecasted to eventually stop growing after 2020. Even if America’s output was enough to slake its domestic consumption, U.S. oil would still reflect the global price.
Another factor is the price of developing and tapping American oil. Saudi Arabia has the largest oil reserves (267 billion barrels) and Saudi crude is easier to access and cheaper to produce. On the other hand, hydraulic fracturing is a complicated process that requires significant investment, and American sources are not easily accessed. If the price of oil were to drop too low, production of American sources would drastically decrease.
While becoming the number one producer of oil in may seem to be a patriotic achievement, it is much more worthwhile to examine the true gains and benefits that this surge could have. The U.S. is likely to see a significant boost in oil production, which will provide economic benefits, improve the energy sector, and give America more diplomatic sway in global energy discussions. However, in the long run, the United States will still need to properly plan for and develop alternative energy sources that address climate change and protect against volatile market prices.
