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America’s oil consumption has dropped 20% since 2005

It’s a mystery worthy of a detective novel: as US consumption patterns have changed, an estimated 4 million barrels a day of the country’s oil demand has simply vanished

Much has been made of the US production renaissance, attributed to onshore unconventional drilling, but it is only half the story. As US unconventional output has surged, the country’s consumption patterns have defied assumptions, dropping by 20% since 2005.

For almost half a century, it has been a given that US oil demand would continue to rise even as its domestic production was falling. But right now, the opposite is the case: US demand is falling as production surges. It is a simple fact with huge implications for the entire North American energy complex.

From a peak of almost 22 million barrels a day (b/d) in 2005, US consumption averaged just 18m b/d so far this year, and is falling at a rate of almost 4.5% per year, according to the Energy Information Administration (EIA). In the first four months of 2012 alone, US liquids consumption fell by a startling 850,000 b/d.

Almost by stealth, 4m b/d have disappeared from the US oil slate since 2005. That loss is more than double the 1.5m b/d of production additions made in the same period. While the supply-side revolution – especially from unconventional shales – garners all the attention, it is the change in consumption patterns that will have the greater effect. Not only will this fall in demand help bring the US closer to energy self-sufficiency, it may establish a new equilibrium in the market.

The surest gauge of falling US demand is imports, which have fallen as domestic production increased. From a peak of about 65% of consumption in 2005, imports now make up a little more than 50% of daily requirements, or 9.8m b/d.

In a recent report, financial services firm Raymond James said imports could fall to 4.5m b/d, or 25% of the total, by 2015 and be virtually eliminated on a net basis by 2020. “Maybe the real question is, when will Washington apply to join Opec?” the report added.

For that matter, Opec’s share of US imports has also fallen, from 46% in 2005 to 40% last year. Most of the US’ non-Opec supplies have come from just two countries: Canada and Brazil.

Most Americans could be forgiven for thinking this trend makes their energy more secure. Despite that optimism, though, gasoline prices continue to rise past $4 a gallon, a level that is generally seen to be an emotional trigger for voters in an election year. Even as the US consumes less oil, its drivers have to pay more for it.

The conundrum is that falling domestic demand for motor fuels has created a surplus of refining capacity in those same markets where demand destruction has been greatest.

According to the EIA, incremental capacity additions have allowed the US to become a net exporter of refined products for the first time since the 1950s, with net sales of petroleum products leaving the US amounting to about 1 million b/d.

Yet most of that incremental available refining capacity is being filled with crudes priced against Brent, not the US’ own benchmark WTI, which trades at about a 15% discount to Brent.

Meanwhile, new crude from the Bakken may be even cheaper – it trades at a discount of about $7.50 to US benchmarks, a direct result of the lack of transportation out of North Dakota, but consumers aren’t paying those lower prices. They’re stuck paying Brent ones.

In fact, despite the gains in production, very little of the US’ own cheaper oil is making its way to consumers in the premium markets. Most of the additional volumes are channeled into the US mid-continent with no outlet to the main consuming markets on the Gulf Coast and eastern seaboard.

The US government’s ad hoc approach to oil pipelines, rejecting Keystone XL from Canada, for example, while giving support to the link’s Cushing-to-Texas extension, has aggravated the problem, giving new supplies of cheap crude little opportunity to reach the market.

Approval of the southern leg of XL will help drain the glut of oil that has built up in Oklahoma, but it will not get Bakken production, or oil from other emerging northern plays, to the US’ big markets.

According to the latest numbers, North Dakota’s oil production is growing by 12,000 b/d per month and now stands at 550,000 b/d. Production has outpaced takeaway capacity at such a rate that 25% of the play’s total production – about 150,000 b/d – has to be shipped via rail rather than pipeline.

The infrastructure deficit could, for now, prevent Bakken output reaching 1m b/d – a dire predicament for an industry that wants to grow. And it’s not just because there is no pipeline capacity. Road and public service infrastructure is lacking, which will limit the number of rigs which can be brought into service, further tempering future output growth. Mark Williams, an executive at Whiting Petroleum, reckons the number of active Bakken rigs will be limited to about 300 working units until infrastructure issues are resolved.

For consumers to see any benefit from higher domestic supplies, these bottlenecks have to be eliminated. It’s not enough to increase output without having routes available to transport the oil to market.

Then there’s the quality of the oil itself. Although US output is rising, much of the increase is not crude oil, but natural gas liquids (NGLs), a byproduct of shale gas. In states like Texas, for example, producers are targeting the liquids to offset low natural gas prices in plays like the Eagle Ford. According to EIA data, NGL production is poised to hit 2.35m b/d in 2012, from 1.75m b/d in 2008, accounting for more than half the increase in US liquids production since 2008.

NGLs are priced like oil, and their volumes are calculated as oil volumes are, but an expansion of the liquids supply would tend to support new petrochemical plants rather than oil refineries. Though the US has not built a new refinery in more than two decades, producers like Shell plan to add new petrochemical capacity close to producing basins such as the Marcellus.

On 19 April, Dow announced plans for a $4bn ethylene cracker at Freeport, Texas. Chevron, Nova Chemicals and Westlake Chemicals have all announced major expansions of brownfield sites in North America.

The US might well be nearing energy self-sufficiency. This may not mean cheaper gasoline, but it will change the fundamentals of the North American market.

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