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US energy independence tempered by oil-price volatility

The EIA forecasts total US crude production will reach 13.1 million barrels per day by 2019

Soaring output of unconventional oil and gas has transformed the US into an energy producing powerhouse. This year, the US is expected to overtake Russia and Saudi Arabia as the world's largest petroleum and natural gas producer, says the Energy Information Administration (EIA). Talk of energy independence has gripped Washington DC.

The EIA forecasts total US crude production will reach 13.1 million barrels per day (b/d) by 2019, largely on the back of a ramp up in unconventional oil production. This would mark a 25% rise from 10.4m b/d in 2011.

US tight oil production was 2.4m b/d in March, according to the EIA, up 46% year-on-year. By 2020 the EIA expects domestic shale oil production will reach 4.3m b/d, around 4.5% of total global output.

US shale gas production is expected to account for half of total US gas output by 2040. By 2020 US shale gas production is expected to reach 12.6 trillion cubic feet, around 9.5% of the global total.

At the same time production is rising, demand has fallen. In the first half of 2013, the US consumed 18.7m b/d of oil, down from 20.8m b/d in 2005. A combination of the US's sluggish economy, fuel-efficiency measures and a shift to gas-fired power generation and gas as a transport fuel have contributed to the fall in demand.

In 2005 the US imported 10.1m b/d of crude and an additional 2.5m b/d of oil products, according to EIA data. This year US oil imports fell to 7.6m b/d, the EIA said, and the country exported 815,000 b/d of oil products.

In 2011 45% of US oil demand was met by imports. This will fall to 34% in 2019 before increasing to 37% in 2040, the EIA said.

These forecasts mark a stunning turnaround in the outlook for the US energy industry from just a few years ago. And it has politicians, economists and foreign policy experts hailing the transformations for the US and global energy markets to come. Yet some are cautioning that many of the more excited expectations should be tempered.

The rise of US unconventionals has already altered well-worn energy trading routes. Europe is now importing US coal, which is no longer needed because of soaring North American gas production. Qatari liquefied natural gas (LNG), originally destined for the US, now has to compete with Russian piped gas for a slice of the European market where demand has been depressed by the economic crisis. Nearly everyone is now pinning their fortunes on gaining access to Asia's booming markets.  

This will not, however, mean the US can simply extricate itself from the complex economic and political machinations of the global energy market as some US politicians have argued, says a recent study, Geopolitical Implications of North American Energy Independence, by Wood Mackenzie, a consultancy. 

The US will remain dependent, for example, on other regions to absorb excess local oil production. This factor alone will limit the geopolitical impact of rising US oil and gas production "ensuring there is no chance of an energy isolationist, rather an energy independent continent", Wood Mackenzie said.

Moreover, because of the higher costs of producing shale oil, compared to conventional crude, increasing US production will be particularly sensitive to international oil-price volatility, argues a new report from the Economist Intelligence Unit (EIU), Diminishing Dependence: shrinking US oil imports

Even if international prices stay high enough to support the current pace of shale development, the US will remain an oil importer for the foreseeable future. Because of this it will remain exposed to volatile global oil prices, EIU analysts said, even if some in the US welcome the fact that a smaller share of its oil comes from the Middle East and more from exporters closer to home, such as Canada..

Although the US only imports around one third of its oil today, down from around 60% in 2005, high global sustained high oil prices have increased the economic burden of its import bill, the EIU said  

"Oil is a fungible commodity: it is traded globally and prices are set internationally. Simply producing more oil will not insulate the US from external shocks," the EIU said.

The US' oil trade deficit rocketed from $24bn in July 2007 to $400bn in July 2008 as oil prices spiked to nearly $150 a barrel, according to the US Diplomatic Council on Energy Security (DCES). This represented 55% of the total US trade deficit.

The import burden eased somewhat as prices retreated In 2011 the country's oil trade deficit was $327bn and the total US trade deficit topped half a trillion dollars, the DCES said. For the fourth consecutive year the US' net oil import bill contributed more than 50% of the country's total trade deficit.

The DCES called a trade deficit of this magnitude unsustainable and said it "creates significant risks and vulnerabilities for the US economy", such as an increased dependency on foreign capital.

Relief, though, may be on its way. A recent report from IHS, a consultancy, claimed production of unconventional oil and gas could cut the US' trade deficit by a third over the next decade by boosting its manufacturing and energy sectors.

If international prices remain high, though, it will inevitably blunt the effect of lower import volumes. "Since oil accounts for a major share of the total cost of US imports high prices reduce the benefits that lower oil imports would otherwise have for the US balance of trade performance," the EIU said.

Many analysts had expected surging US oil production to help push international crude prices lower over the short term. That may still happen. But for now a rise in unplanned outages in crude supply from Opec members and reduced spare capacity levels are limiting the effect on global prices of rising US oil production.

Spare production capacity from Opec members, mostly Saudi Arabia, has fallen from 4m b/d in mid-2012 down to 2m b/d, Adam Sieminski, head of the EIA, told Petroleum Economist.

The Saudis have had to ramp up output to make up for outages that have occurred because of sabotage in Nigeria political problems that are plaguing Libya's oil industry.

"At about 2 % of global demand that's pretty tight. The risk (of oil-price shocks) runs exponentially higher. I think the world runs much more comfortably when we have 3-5m b/d (spare capacity)," Sieminski said. "What might be considered relatively small disturbances overall can have a bigger impact on prices."

There is also uncertainty over how much liquefied natural gas (LNG) the US will export and the impact this will have on global gas markets. The US Department of Energy has granted LNG export licenses to four projects. A further 18 projects are awaiting approval.

US LNG exports has become a deeply political issue, pitting the US petrochemical industry, which has enjoyed cheap feedstock from historically low Henry Hub prices, against hopeful LNG exporters.

Average Henry Hub spot prices were around $3.40 per million British thermal units (Btu) in August. This is down from average prices of $9.50/m Btu in August 2005.

Dow Chemical has been an outspoken opponent of exporting the US' shale bounty, saying it could push up domestic gas prices to international levels causing the sector to lose the advantage of low prices. US manufacturing has enjoyed an upswing over the past couple years, propelled by cheaper energy costs than its international competitors.

In the end, the demand outlook and international gas prices will determine which projects go ahead.

"I imagine the actual amount of (LNG) exports will not equal all of the permits applied for and granted," Sieminski said. "Getting a permit doesn't mean you will actually succeed in the market place."

Sieminski added that even if US gas prices increased as a result of LNG exports it wouldn't reach levels in Europe or Asia which are typically two or three times higher respectively.  

China

It is China's soaring energy consumption, analysts say, rather than the US' rising production, which will fundamentally shift the world energy order

In October, China is expected to overtake the US to become the world's largest oil importer. By 2040 the EIA expects China's energy consumption will be double that of the US', at 220 quadrillion Btu.

"While North American exports will provide boundaries for coal, oil and gas prices, it will be the trajectory of China's import demand that determines when these barriers are tested," Paul McConnell, an analyst at Wood Mackenzie said. "China will assume greater responsibility in the Middle East, but it will be in partnership with the United States, rather than instead of it."

China's burgeoning energy relationship with Russia could prove to be the biggest story for global energy markets. Wood Mackenzie reckons Russia's energy trade with China will quadruple by 2025 and that it will be this Russo-Sino relationship that will truly shift global energy boundaries. 

That could prove problematic for international investors. China's reluctance to share oil import data with the international community is one of biggest risks to global oil-price shocks, Sieminski said.

"Markets don't like surprises and if there's better information available on what inventory levels are it's going to make a more accurate assessment of what the situation really looks like," Sieminski said. "And with most of the growth coming in the world's energy consumption from Asia and the Middle East over the next 10 or 20 years, not having good data from the Far East, Russia and the Middle East makes that transparency issue a serious one."

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