Recent US and World Energy Changes

The views in this blog are, of course, solely the author's own, and do not represent the official views of either the U of Michigan, Ann Arbor, or its Energy Institute, of which the author has been a Fellow since 2008 or so.

I have been following the world energy industry, and the oil industry in particular, on a daily basis, ever since my MBA thesis on the evolution of Oil Tanker Shipping at the Sloan School at MIT. I have also been receiving and studying the annual Statistical Survey on World Energy published by BP since the mid-1980s.

 

At that time, the picture was quite different from that of today, and it is instructive to look back at it, especially to these misled souls believing in various “Peak Oil” “we are running out of oil”, utterly unscientific fearmongers, who, however, are always welcome on TV news shows, whose ratings are always higher when they report bad news (or even just pessimistic forecasts). We knew they were wrong from the beginning, but they were proved wrong beyond any doubt the last few years, especially with the ability to produce vast quantities of unconventional oil and gas from oil sands in Canada, oil shales in the US, and various unconventional natural gas reservoirs.

 

Back then, around 1985, the Statistical Survey listed the so-called 'proven oil reserves' at a tiny fraction of what they are today. Moreover, since then, the demand grew by more than 50%, which makes it even more incredible. But it is true, and some the reasons are hinted in 1. the word “PROVEN” reserves, which means a tiny fraction, even today, of ALL reserves, 2. the qualification “Economically Recoverable”, which is a much larger amount of oil when the world price is $100 and $110 a barrel today, vs the... $16 and even $9 a barrel it was in the mid-80s, and 3. The fact that these “proven reserves” are very pessimistic numbers, compared to the actual amount of oil in any reservoir, and in fact there are rules for reporting the proven reserves that require a huge probability of being there, which makes these estimates very pessimistic in most cases.

 

Let's now move to the USA situation. Before 1940, the US was not only a major oil producer, but also a major oil exporter. This changed dramatically after the war, and especially during the economic boom of the 50s and 60s, where cars became more and more powerful, more numerous, and used more and more gasoline. The US started importing bigger and bigger amounts of oil from OPEC and other nations, and spent additional money to protect the safety of the oil supply to itself and its Western European Allies. The bills for each year's US oil imports became astronomically high, of the order of half a trillion $ a year, until 2007 or so, and the US trade deficit with its world trading partners widened, largely because of that huge oil bill, but also due to the large amount of luxury goods, cars etc, imported from Europe and Japan.

 

Then came the high oil prices in May 2008, which crossed the $100 a barrel mark for the first time, and reached a high of almost $150 a barrel ($147?) for a brief moment. This changed US consumer behavior tremendously and immediately, as shown in May 2008 US light vehicle sales. Before that, the Ford F-150 pickup truck was the number one vehicle for more than two decades, and many buyers also preferred large, fuel-thirsty SUVs. However, in May 2008, the number one seller was, surprisingly or not, the tiny, fuel efficient Honda Civic, and then followed other fuel efficient vehicles as the Toyota Corolla and Camry and the Honda Accord, and then, in the 5^th place, was the old champion, the F-150! When oil prices receded, the F-150 regained its number one position, but the prices went up again later, and even until today, and they have not gone below $100 a barrel for long intervals.

 

The effect of these higher oil prices on oil consumption in the US was, not surprisingly to anybody that knows even a tiny amount of economics, or just has ordinary common sense, immense. The US was criticized for decades, before 2008, for being only 5% of the world population, but consuming 25% of the world's energy (not just oil, gas, coal and other too). Even back then, that criticism was not totally fair, since the US economy was very energy efficient in the sense of unit of GDP produced per unit of energy spent, compared to many other nations.

 

As anyone can see in the BP Statistical Review of World Energy, while the US population grew at a very healthy rate, both before and after 2008, and even the US economy, after the 2008 banking crisis, resumed its growth and has had very healthy growth since 2009 or so, US oil consumption fell, instead of rising, for several years in a row. This was due to people driving their existing cars for a smaller number of miles every year, but also due to the very different mix of cars they bought after 2008. Hybrids like the Toyota Prius sold so many units, they became high-volume mainstream cars. But every other non-hybrid car had substantial improvements in their fuel economy. Later, plug-in Electric and Pure Electric vehicles were also offered, although their sales so far have been tiny, but some have potential for much bigger sales. In addition, Diesels are making a comeback, and they are 30% or more efficient than their gas counterparts.

 

Therefore, we are now in a situation where the US oil consumption has fallen considerably, before it started rising again, and is at a much lower level than the one predicted 10 years ago, but, more importantly, the US oil imports, which cost it almost half a trillion $ annually, have become much, much smaller, the US domestic oil production has risen so much (largely due to the unconventional oil shales), that it rivals that of the two largest oil producers in the world, Russia and Saudi Arabia, and, if it continues at the same pace, the US may soon become a net oil exporter once again! This is a huge, significant change.

 

One can think of many implications of this change, not only inside the US, but also in its foreign policy, especially in the Middle East. I usually do not like to make forecasts, since “Those who look at crystal balls eat broken glass”, as my friend Martin Stopford so well put it. Of course, one has to have support from policies in Washington DC, and so far, environmentalist concerns have succeeded in slowing down the development a lot of the infrastructure needed to develop, distribute and export US and Canadian unconventional oil.

 

The XL pipeline is an excellent example. Even though very detailed studies have been made, proving that the environmental impact of it is acceptable, activists in environmental groups have succeeded in not yet approving it by the Obama Administration. Of course, it is not a coincidence that these groups vote to a huge extent Democrat, and we have the midterm elections (House and Senate) in November 2014. Maybe after the elections are over, the pipeline will be approved, but Canada is already very impatient and is suggesting that if the US does not approve the pipeline, it will export its unconventional oil (oil sands in Alberta) to Asia instead.

 

In fact, not approving the pipeline has forced unconventional oil producers in the US to use comparatively much more inefficient freight trains instead. This is not only inefficient, it has created a shortage of locomotives to transport other goods that were and should go by train, such as cars. Indeed, many automakers today have high demand for some of their models that they cannot satisfy, because they cannot transport the new cars to their prospective buyers.

 

The above is some of the new landscape in World Energy, with emphasis on the changes in the USA. Another big question is, we now seem to have endless supply of oil and gas from unconventional sources, but prices have not yet fallen. Inevitably they will, if the oil is produced, but when is anybody's guess. Cheap Energy, in my observations of US economic history, has always been a necessary condition for any strong economic and jobs growth.