The US Oil Shale Revolution: Will It Lead to Lower Fuel Costs?
The most recent statistics are startling: US crude production grew 14.6% in 2012, achieving the highest year-on-year increase since 1995. The start of 2013 has seen production break above seven million barrels per day to reach a 20-year high. Even more remarkable, exponential growth is being seen from just a few shale plays, with a number more yet to reveal their full potential.
The US has experienced an impressive turnaround in its energy fortunes in just a few years. In 2005, the US was importing 60% of its oil needs. US oil production had been in structural decline since the late 1980s, leaving the country not only highly reliant upon supplies from neighbors Canada and Mexico, but also from countries such as Venezuela, Nigeria, Russia, and Saudi Arabia. But in just seven years, the US has seen domestic production increase at such a pace that imports have subsequently dropped to below 40%.
The World’s Largest Consumer and Producer
According to the International Energy Agency (IEA), the trend of increasing domestic output is set to continue. The agency predicts imports will drop over the next decade from the current average of 10 million barrels per day to approximately four million barrels per day. This drop will not only be due to increasing production in the US, but also due to higher fuel-efficiency standards for vehicles.
In fact, the IEA projects total US liquids production (includes crude and natural gas liquids) will surpass that of Saudi Arabia by 2020 to reach 11.1 million barrels per day. This means that the world’s largest fuel consumer would become the world’s largest producer.
Gasoline and Diesel Prices Linked to Crude Oil
Given this domestic backdrop, there is a presumption that growing domestic production will lead to lower fuel costs in the US, as has been observed with natural gas. This is unlikely to be the case. Natural gas is priced domestically because of limited trade with the global market, whereas gasoline and diesel prices are dictated by the price of crude oil and the product markets, which are driven largely by global fundamentals.
If the global crude markets reflected US dynamics, this presumption might hold true; demand in the US and other developed countries is declining and is set to flat-line over the coming years and decades due to increasing efficiencies and declining energy intensity. In contrast, global oil demand growth is set to rise at a rapid clip, driven on by emerging market demand. Therefore, while the US will see distinct benefits from rising domestic production in the form of greater energy independence, lower prices at the pump soley as a result of stronger production seem a much less likely scenario.
What Does It Mean to You?
Global oil markets will still dictate prices, even as production of oil from shale grows in the US. The challenge of understanding global crude markets and global product markets is immense. Throw in the influence of complicated geopolitics, and the challenge of keeping up with how crude and product prices will evolve becomes time and cost-prohibitive for companies whose core business is not forecasting energy markets. The common presumption that the US shale oil boom should reduce gasoline and diesel prices in the US is a great reminder of how counterintuitive these markets can be without in-depth research to drive conclusions and actions.
Lisa Zembrodt is manager of global research and analytics for Schneider Electric, Professional Services. If you would like to read four more global trends which are set to shape the future of energy, download Schneider Electric’s whitepaper on the topic at www.SEcontact.com/trends.
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