The rising production trends for American oil and natural gas are not only benefiting the U.S. domestic economy, but also the country’s trade balance, its geopolitical standing, and its economic impact on world energy markets. In this two-part series, we focus first on the “oil” part of the story; the second article will highlight the impact of the natural gas resurgence.
But first, it is important to showcase the larger context that includes both oil and natural gas. The domestic developments are remarkable enough. U.S. average liquids production in the first half of 2013 averaged 9.7 million barrels per day, a level not seen since 1988. That was an increase of nearly three million barrels per day from 2008, or the equivalent of adding another mid-tier Middle Eastern producer such as Kuwait. Meanwhile, natural gas production in 2011 had already reached a new, all-time high of 24 trillion cubic feet — which it surpassed in 2012 at 25.3 trillion cubic feet to rack up seven annual increases in a row.
Along with increased energy supplies comes growth in industry jobs. According to the Bureau of Labor Statistics state-level data, Pennsylvania, New Mexico, and Louisiana saw more than 70 percent of their net job growth from 2005 to 2012 come from oil and natural gas upstream and midstream jobs. That figure was roughly 30 to 40 percent for West Virginia and Oklahoma, and from 10 to 20 percent for North Dakota, Texas, Colorado, Alaska, Kansas, Wyoming, and Montana. This does not include indirect and induced job creation that typically spins off new jobs in supply industries or the broader economic benefits that result from increased employment and spending trends. According to a recent study by IHS, the unconventional oil and gas value chain supports more than 2.1 million jobs today, a figure forecast to rise to more than 3.3 million jobs in 2020 and 3.9 million by 2025. The oil and gas value chain’s contribution to U.S. GDP was more than $284 billion in 2012, and is on track to grow to $533 billion in 2025. IHS foresees the U.S. trade deficit reduced by more than $164 billion in 2020 thanks to unconventional production, equivalent to one-third of the current U.S. trade deficit.
Meanwhile, these two fuels have become of greater importance to our economy’s energy mix in amount, if not in overall share. In 2012, although oil’s share of total energy, still the largest for any fuel, had slipped to 36.5 percent from 45.5 percent in 1975, consumption was higher by about six percent. The share for natural gas in 2012 was about the same as in 1975 at 27.3 percent, but the volume was up more than 30 percent.
Impact on Trade
The impact of this increased U.S. oil and natural gas production on international trade has been monumental: reduced net imports of oil and natural gas, signifying unquestionable gains for the U.S. trade balance.
The trade potential for U.S. energy is especially evident with respect to our North American neighbors. U.S. energy trade with Canada and Mexico, in dollar terms, is at or near the top of the list for both countries. For U.S. trade with Mexico, oil and natural gas as a product category was No.1 for both imports and exports for 2012, according to the Congressional Research Service (“NAFTA at 20: Overview and Trade Effects”, February 2013). For trade with Canada, oil and natural gas ranked third for U.S. imports and fourth for exports. By volume, the two account for nearly 40 percent of U.S. oil imports and 30 percent of oil exports. Furthermore, since these two account for almost all of current U.S. natural gas trade, the North American market is an important introductory chapter of the unfolding natural gas trade globalization story. U.S. exports of natural gas to both these countries reached record highs in 2012.
The most obvious result of increased U.S. crude oil production, when combined with a roughly equal decline in consumption, has been a dramatic decline in overall imports. From its peak in 2005 of more than 12.5 million barrels per day to 7.4 million barrels per day in 2012, U.S. net imports of petroleum fell more than 40 percent, by enough to nearly equal half of Saudi Arabia’s production. Even with product exports almost tripling over that period to 3.2 million barrels per day (almost equal to Iran’s crude oil production), gross imports of crude oil and products into the U.S. still fell more than three million barrels per day.
Net reliance on imports for the U.S. in 2005 had been over 60 percent, but that fell to 40 percent by 2012 and 35 percent so far in 2013. The U.S. has not been in this enviable position since the mid-1970s, at the time of the 1973 Arab oil embargo.
The rise in petroleum product exports has been notable. While U.S. demand has been stable, world petroleum demand continues to grow, particularly in developing countries. Therefore, it is not surprising that the U.S., as the world’s largest refiner with one-fifth of the world’s refining capacity, having satisfied domestic markets, has responded to these international market opportunities.
In the first half of 2013, more than 80 percent of U.S. product exports went to Canada, Mexico, Latin America, or Europe. The largest product export volume consisted of diesel fuel and other distillate fuel oil, amounting to 934,000 barrels per day of the total 3.1 million barrels per day of product exports, or about 30 percent. As noted in an earlier article, diesel fuel has experienced particularly strong demand around the world. Gasoline exports (including gasoline blending components) amounted to a little more than half of that, mostly going to Mexico, whose refineries cannot meet all of the country’s internal demand, and other Latin American and Caribbean destinations.
While the U.S. liquids production revolution has helped to reduce net imports and allow for greater export opportunities, there are less obvious benefits. U.S. refineries are sophisticated and have been constructed to process a wide range of crude qualities. The lighter, sweeter crudes that have been added to domestic oil production have given U.S. refineries more flexibility to shop for the most economical imported crudes to complete the refinery input slate. These tend to be heavier, lower gravity crudes. In 2000, only 25 percent of imported crude oil had a gravity of 25 degrees or less. By the first half of 2013, the amount of imported crude oil in this less expensive category had reached 50 percent. At the same time, U.S. dependence has declined for imported light, sweet crude from at times politically unstable African countries. Imports from Nigeria, Angola, Algeria, and Libya accounted for more than 20 percent of U.S. crude imports in 2007, a share that shrank to eight percent in the first half of 2013. The heavier imported crudes (for refineries capable of processing them) are favorable for producing the diesel fuel that is in such great demand worldwide and growing domestically as well.
The large shifts in physical trade volumes have had a financial impact in the billions of dollars. Imported oil prices roughly doubled between 2005 and 2012. During this time, a rise in U.S. production coincided with a reduction in consumption, ultimately leading to a 40 percent decline in total imports, saving $180 billion in import costs. These figures, primarily aimed at giving a sense of the orders of magnitude involved, suggest the merchandise trade deficit could have otherwise been 25 percent larger – closer to $920 billion instead of $741 billion.
U.S. Standing in World Energy Markets
The effects of the U.S. oil and natural gas resurgence reach beyond the trade figures, influencing our country’s energy security and its standing in world energy markets. According to EIA, unplanned disruptions in OPEC and non-OPEC producing countries recently reached the highest level in at least two and a half years, at 2.7 million barrels per day. Increased American energy supplies can reduce the impact of external disruptions, especially when compared with countries where dependency is greater, such as our trading partners in Europe and Asia.
As for the U.S. standing in world energy markets, in 2012 the U.S. had the largest increases for both oil and natural gas production for any country in the world (according to BP’s Statistical Review of World Energy). The U.S. is the largest producer of natural gas in the world and the third largest oil producer.
One “standing” that may be lost in the near future is in reference to our oil imports. A number of analysts predict that China will soon become the world’s largest oil importer, with EIA saying as soon as later this year. As more Mideast crude heads east to Asia, rather than west – nearly 75 percent in 2012, up from 60 percent in 2000 — increases in U.S. domestic output has helped to fill the gap.
The impact of the U.S. oil production increase on world markets has been significant in a larger way: while world demand rose nearly seven barrels per day from 2005 through the first half of 2013, U.S. liquids production rose nearly three million barrels per day. Or put another way, U.S. net imports have dropped nearly six million barrels per day over that period, while non-OECD demand has risen nearly 12 million barrels per day. In other words, the U.S. trend has helped ease the strain on world markets and the demand for OPEC oil. Thus, the boost in energy security is not just a narrow one of reduced U.S. imports and less U.S. reliance on the Middle East, but also one of a broader, global impact on the oil market’s equilibrium.
The increases in American oil and natural gas production have not only led to local, regional, and national benefits in terms of jobs, economic growth, and government revenues, but these gains are having international impacts as well. Increased American production has bolstered economic competitiveness, offered greater flexibility in energy inputs including feedstock for U.S. manufacturing, and provided greater options for the U.S. to earn export revenue. By reducing reliance on energy imports, American oil and natural gas have enhanced national security and increased U.S. international political and economic leverage.
As China, Russia, and the Middle East have illustrated, energy plays a critical role in foreign policy as well as domestic economic policy. And in a global economy where oil and natural gas play such a foundational role, the energy supply renaissance in the U.S. has indeed put our country in an enviable position. The U.S. has begun to experience some of these ripple effects as increased U.S. production has both increased the average American household income and improved our trade deficit.