The Fuse

What 10 Million Barrels Per Day Does—and Doesn’t—Mean

by Matt Piotrowski | February 06, 2018

Crude oil production in the United States has passed the 10 million barrel-per-day level (Mbd) and will soon break the all-time record set in 1970. The surge in shale output has revitalized the nation’s oil sector, lowered pump prices for consumers, and reduced net petroleum imports to just 2.6 Mbd. This is a sharp turnaround from a decade ago, when production fell to just 5 Mbd, consumers were paying $4 per gallon for their gasoline, and we imported approximately 60 percent of our petroleum needs.

The surge in shale output has revitalized the nation’s oil sector, lowered pump prices for consumers, and reduced net petroleum imports to just 2.6 Mbd.

The remarkable shift should be celebrated, but it is also important to remember how much surrounding U.S. energy security has not changed. More than 90 percent of the transportation is fueled by petroleum, we still import 45 percent of our crude oil, and consumers are vulnerable to price swings and supply outages on the global market.

“The steep fall in net oil imports does not mean the U.S. economy is immune to the effects of an oil price shock,” said Ed Crooks, Energy Editor at the FT, in a well-crafted Twitter thread last week.

In the past year, despite rapid growth in shale, we have seen the negative effects of an unfree international market and supply outages due to geopolitical instability. The coordinated action between OPEC and its non-OPEC partners such as Russia has restricted global production, while output declines in Venezuela—a major U.S. supplier—have accelerated amid social unrest, political tumult, and ongoing mismanagement. The supply problems are occurring against the backdrop of rising demand, particularly in emerging markets.

“The reason oil prices have been volatile has been that both supply and demand are inelastic, so you need a big move in price to bring supply and demand into balance,” Crooks said on Twitter.

Rising shale and lower imports have not significantly altered U.S. foreign policy.

Rising shale and lower imports have not significantly altered U.S. foreign policy. We are still involved in the Middle East and other oil-producing regions, which are prone to unpredictability. It is likely that we and our allies will be reliant on these areas for crude oil supply for decades to come. Even now, approximately 37 percent of U.S. crude imports come from OPEC countries.

“The U.S. has not given up its strategic involvement in the Middle East, both because it has non-oil interests there, and because oil disruption would affect U.S. trading partners,” said Crooks. “And although the U.S. has more freedom to use oil-related sanctions as a policy tool, there are limits.”

We could see a more volatile and unstable global oil market in the future since shale’s outlook is uncertain and investment in conventional fields has declined in the past few years. Higher U.S. production has currently brought some semblance of stability to global oil prices, but a return to $100 per barrel oil, higher imports, and greater reliance on OPEC appears likely.

“If oil demand keeps growing, it will at some point exhaust shale’s capacity to keep increasing supply.”

“If oil demand keeps growing, it will at some point exhaust shale’s capacity to keep increasing supply,” said Crooks. “When that point is reached, the results could be messy. The past two decades of historical volatility in crude certainly do not suggest there has been any clear downward shift since the shale oil boom began. The U.S. shale revolution has certainly had some momentous consequences… But many of the economic and security issues raised by oil are still with us.”

Reaching the 10 Mbd is an important milestone, but it is important that it does not make the country complacent.

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