The trend of increasing US dependence on oil imports has been reversed. This is due to a fall in domestic oil demand and increases in production driven by the growing application of horizontal drilling and hydraulic fracturing.
Oil imports are predicted to decrease for at least a decade, reflecting continuing falls in consumption driven by recent tightening of Corporate Average Fuel Economy (CAFE) standards for automobile fuel efficiency, as well as further development of the oil accessed by new technologies. Beyond 2020, there is the possibility of another round of stricter fuel efficiency standards. Oil production may continue to increase, but it may also reach a plateau or fall.
There has been a similar shift in the prospects for US gas. While consumption has continued to rise, domestic production – from shale resources – has increased dramatically. As a result, the United States is preparing to export, rather than import, natural gas.
The speed of these changes has created transitional problems: the new US oil supplies are replacing light and low-sulphur crude from the Atlantic region, while refineries designed and located to process Middle East crude are continuing to import it – often in order to export products to external markets.
There is a surplus of natural gas, which is depressing prices to the point where gas companies are delaying investment. Meanwhile, companies are developing new markets for natural gas in the transport sector, while the electricity sector and the petrochemical industries are investing in expanding the use of gas.
Even when US prices do recover, the higher gas prices in Asia and Europe are a powerful long-term driver for expanding exports. Companies are competing to build export terminals on the Pacific coast, as well as converting terminals on the Gulf and Atlantic coasts originally intended for the import of LNG.
These changes in trend, and transitional disruptions, have several consequences:
• The United States is moving from a long history in which its energy system has been an economic and security liability to a situation in which it will be a source of economic strength and geopolitical security.
• There are problems for Canada. Canadian exports of oil from the Athabasca tar sands are being substituted with light sweet crude produced in the United States. Canadian gas exports to the United States will also lose markets. There is competition between Canadian and US gas producers and terminal developers to build pipelines and terminals to take gas to the Pacific coast for exports to Asia. There, the impact of North American gas exports on the pricing structure for LNG will be considerable, even though the volumes involved will have little effect on US prices.
• The new sources of US oil and gas are located inland. Even when the transportation system has been reconfigured, the logistical costs will create a wedge between lower US prices and international prices for oil and LNG. US industrial consumers will enjoy a competitive advantage in global markets, and electricity generators will have access to cheap fuels.
• US imports will be falling at the same time as imports from the Middle East are being absorbed by Asian markets. This means that not only is US dependence on imports decreasing, but the Middle East element in US imports will eventually either disappear or be limited to Saudi Arabia’s supplies to its own refineries in the United States. As a consequence, US commitments to defence of Middle East export routes come into question. Lower imports by the United States will also reduce its obligations to hold strategic stocks within the IEA regime; some of these may be sold off, reducing the stocks available to the IEA Emergency Response Mechanism.
• The United States will continue to have an economic interest in global energy security. It is likely to remain an oil importer – if only from Canada and Mexico. US oil prices will spike or fall when global prices change as a result of exogenous events. Exports of natural gas and coal will not compensate in value terms, and prices may not adjust to match increases in global oil prices.
Taken together, the changes in US energy are profound: energy policy may now concentrate on economic and climate priorities, rather than security. ‘Energy security’ is no longer a strong argument for leasing environmentally sensitive acreage for new oil and gas drilling. This will affect companies that have focused their future plans on such areas offshore, in wilderness areas and in the Arctic.
*“US Energy: The New Reality” by John Mitchell, Associate Research Fellow of the Energy, Environment and Resources Department at Chatham House. The full text is available on the Chatham House website.