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Rising U.S. Oil Supply and the Impact on Global Markets

Mark Green

Mark Green
Posted May 17, 2013

Increasing U.S. domestic production of oil matters. Energy Information Administration (EIA) chief Adam Sieminski had this analysis at an energy conference earlier this week (h/t Breaking Energy):

“There’s a fairly significant, long-standing relationship between spare production capacity in OPEC and what the pricing environment is for oil. So the 2 million barrel per day  increase in U.S. oil production that surprisingly took place over the last five years has resulted in higher OPEC spare capacity, and undoubtedly, has been a factor in why Brent oil prices are $103-$104/bbl rather than $125-$130/bbl.”

In other words, the head of the federal agency that analyzes energy data says the recent growth in U.S. production has helped reduce the price of Brent crude, a leading global benchmark, by about $25 a barrel. That’s big, because the cost of crude oil is the single biggest factor in the price of gasoline, as this infographic shows:

What Consumers Are Paying At The Pump

 

Sieminski refers to the impact on the global crude market of growing U.S. oil production, which rose to 6.5 million bbl last year, compared to 5 million bbl in 2008. Sieminski said OPEC spare capacity “is a function of what demand is globally and what supply is outside of OPEC, with OPEC then filling in.” More U.S. production means more global supply outside OPEC, bolstering OPEC spare capacity and exerting downward pressure on global crude prices.

Another takeaway from Sieminski that’s as important: Continued growth in U.S. oil production could impact the global crude market even further. Breaking Energy reports:

If the agency’s high resource case for liquids production were to come to fruition, the US could be a net exporter of oil sometime in the 2034-2035 timeframe, and “oil prices themselves could be a lot lower than EIA’s reference case forecast, which has prices out in the year 2040 up close to $160/bbl,” (Sieminski) said.

First – thanks, fracking. The combination of hydraulic fracturing and horizontal drilling techniques, plus advances in the use of them, is unlocking vast U.S. reserves of natural gas and tight oil – from shale and other tight rock formations. Recently, the International Energy Agency said U.S. oil production would be the main driver of global supply growth over the next five years. At the IHS CERAWeek conference earlier this year, Sieminski suggested U.S. oil output is growing so fast a number of past EIA production projections were obsolete.

The challenge is to build on that growth by increasing access to U.S. reserves, onshore and offshore – where 87 percent of federal acreage remains off-limits to development. With greater access to federally controlled areas we will see more production gains, increased job creation and more revenue generated for government – while exerting downward pressure on the global crude oil market. Good things all.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.