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U.S. Redraws World Oil Map

November 13, 2012
Wall Street Journal
BENOÎT FAUCON And KEITH JOHNSON

 

A shale-oil boom will help the U.S. overtake Saudi Arabia as the world's largest oil producer by 2020, according to the International Energy Agency, a shift that could transform not just energy supplies but also U.S. politics and diplomacy.

The Paris-based agency, which advises industrialized nations on their energy policies, said the global energy map "is being redrawn by the resurgence in oil and gas production in the United States."

The assessment—a stark contrast from last year, when Russia and Saudi Arabia were seen vying for the top position—comes a week after the end of a presidential campaign in which energy was a prime topic, and it shows how different President Barack Obama's second term will be from his first on energy policy.

Four years ago, the perception of energy scarcity and rising concern about global warming led Mr. Obama to push for legislation capping greenhouse-gas emissions and to pump billions of federal dollars into green-energy companies. Both policies caused grief for the president, as the greenhouse-gas bill died in the Senate and Republicans attacked him over the bankruptcy of solar-panel maker Solyndra LLC.

In Mr. Obama's second term, Republican control of the House makes any big climate-change legislation unlikely, and budget deficits will limit any effort to spend billions more on green-energy projects.

But the surge in U.S. oil production, to a projected 11.1 million barrels a day in 2020, has given the White House a chance to make peace with Republicans and energy executives, at least on some fronts. Like Republicans, Mr. Obama has said that growing energy extraction in the U.S. can create jobs and boost the economy. Also, the rising use of natural gas in place of coal to generate electricity helps reduce carbon-dioxide emissions without legislation.

The IEA, an authoritative source of information on global oil markets, is joining other forecasters such as the Organization of the Petroleum Exporting Countries and the U.S. Energy Information Administration in predicting the sharp rise in U.S. oil production in the coming years.

The IEA also said natural gas will displace oil as the largest single fuel in the U.S. energy mix by 2030. U.S. carbon-dioxide emissions from energy consumption were down 5.3% in the first seven months of 2012, compared to the same period a year earlier, according to U.S. government figures. That came as natural gas accounted for 31% of U.S. electricity generation in the first eight months of this year, up from 24% a year earlier.

"The entire energy policy of the U.S. has been about scarcity, derived from the 1970s supply shocks," said Kevin Book, managing director at Clearview Energy Partners LLC. "Now, we have a different reality—the age of energy adequacy."

Higher U.S. oil production doesn't necessarily mean lower prices at the gasoline pump, because oil prices are set on the global market, and U.S. oil is expensive to extract. Next-month oil futures traded around $85.62 a barrel late Monday, down from nearly $100 a barrel in September. U.S. and Iraqi production have helped keep a lid on prices, but a bigger factor may be Europe's economic woes and weaker global demand.

A shale-oil boom will help the U.S. overtake Saudi Arabia as the world's largest oil producer by 2020. Above, a ConocoPhillips refinery in San Pedro, California.

For U.S. businesses, the energy shifts bring opportunities. The glut of inexpensive natural gas from widespread use of hydraulic fracturing, or fracking, has driven down energy costs for industrial consumers, helping large manufacturers, as well as the fertilizer and chemical firms.

But the changes can take industry players off guard. Some U.S. refiners spent billions upgrading their refineries to process heavier crude oil found outside the U.S. in places such as Venezuela's Orinoco belt or in Canada's tar sands. If the IEA's predictions come true, the U.S. could soon be awash in easier-to-process domestic crude oil—with no way to get rid of the excess supply, because U.S. law generally bans crude-oil exports. That would force new investment in refining capacity for lighter, sweeter grades of oil.

The made-in-USA oil is already displacing imports of similar crude from West Africa, and the market for it could be saturated as early as 2013, said analysts with Raymond James. "The question is: will federal regulators allow these exports to materialize?" the analysts asked in a research note, adding that allowing exports could be politically tricky. The crude export ban was designed to ensure U.S. energy security following the Arab oil embargo in 1973.

Within a decade, the IEA forecasts U.S. oil imports will fall by more than half, to just four million barrels a day from 10 million barrels a day currently. It credited tougher gas-mileage standards for cars, mandated in Mr. Obama's first term, in addition to the higher domestic oil output.

The IEA suggested that newly found U.S. energy independence could redefine military commitments. OPEC will continue to be the powerhouse of global production, the agency said, but a growing portion of its output will go to nations like China and India instead of North America.

"It accelerates the switch in direction of international oil trade toward Asia, putting a focus on the security of the strategic routes that bring Middle East oil to Asian markets," it said.

China already receives half of its oil imports from the Persian Gulf, while the U.S. receives less than 20% of its imports from the region. U.S. military protection of Middle East sea lanes has for decades been a core mission of the Navy's Fifth Fleet, at an estimated cost of between $60 billion and $80 billion a year. Given the high U.S. budget deficit, looming defense cuts and what many perceive as an overstretched Navy, that mission could come into question.

However, no other navy could ensure global freedom of navigation on the high seas, a task the British Navy carried out during the 19th and early 20th century and which the U.S. Navy has handled since World War II.

The recent increase in U.S. oil and gas drilling has led to a backlash that is particularly strong among people who supported Mr. Obama. Environmental groups have expressed concern about the risk to groundwater from fracking, a technology that uses pressurized water and chemicals to break open rocks to access more oil and natural gas.

The intensive use of water "will increasingly impose additional costs" and could "threaten the viability of projects" for shale oil and gas, the IEA said.

Delighting environmental activists, Mr. Obama blocked the Keystone XL pipeline from Canada through the central U.S., expressing concern about risks to an important aquifer in Nebraska along the pipeline's route. Republicans and the energy industry claimed the decision was evidence the administration was hostile to traditional energy sources.

Mr. Obama must also decide how quickly he wants to push the transition to natural gas from coal for generating electricity. Following a 2007 Supreme Court ruling, the Environmental Protection Agency is soon set to complete emissions rules for new power plants, which could be so strict as to make new coal-fired plants prohibitively expensive.

Mr. Obama backed an "all of the above" energy policy in the campaign, saying he supports oil, gas and clean coal, as well as renewable sources.

Meanwhile, after Hurricane Sandy and other weather events revived fears about global warming, the administration is hearing new calls for a carbon tax, designed to stimulate alternative energy by making oil, gas and coal more expensive. The idea has gained traction even among Republican economists, and a leading conservative think tank, the American Enterprise Institute, is debating the issue Tuesday. But House Republicans are loath to raise taxes.

 

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