I was under the impression that this was a given; however, I’m discovering, yet again, that I’m in the minority. Regardless, and more to the point, the US must not try to be free of substantial quantities of imported oil, and as long as the US government doesn’t interfere with the functioning of the economy, the US cannot be free of substantial quantities of imported oil.
The short answer to the question of “why?” is because the marginal cost to produce shale oil in the US is somewhere around $60/Barrel (BBL), while the marginal cost to produce oil outside of the US is substantially below that. And, in the case of a country like Saudi Arabia, their cost to produce oil is well less than $10/BBL. Combine this with the growth prospect of oil demand versus what the increase in oil supply would look like, the US cannot be and, more importantly, should not strive to be independent of imported oil.
According to the EIA, in 2011, the US consumes roughly 20 million barrels of oil per day (MMBBLS/Day) and produces roughly 8 MMBBLS/Day and imports some 12 MMBBLS/Day. If as some experts believe that we will be free of oil imports by 2020 then this means that the US will have increased oil production by some 12 MMBBLS/Day. For now, forgetting about the need for more infrastructure, new or converted refining capacity, and changing demand picture in the US, let’s assume that all 12 MMBBLS/Day of new US production can be delivered to the market. What effect will this have on global oil supply? From 1996 to 2010, the world consumption of oil grew by some 16.2 MMBBLS/Day or an average of some 1.16 MMBBLS/Day/Year – and this was during boom years. Regardless, if we assume that the global demand for oil increases by the same rate, by 2020, world demand for oil should grow by some 8 MMBBLS/Day. This means that the global markets will have excess capacity of at least 4 MMBBLS/Day. Therefore, in a 95 MMBBLS/Day oil market, a 4 MMBBLS/Day excess capacity means that the price of oil will crater, given that current excess capacity is thought to be some 1.0-1.5 MMBBLS/Day.
Continuing with this analysis, if the world creates 5.0-5.5 MMBBLS/Day of excess capacity, oil prices should drop well below $60/BBL causing US shale oil production to decline forcing the US to import more foreign oil until the excess capacity is absorbed, in this case 4 MMBBLS/Day. Theoretically, at these levels, there should be a rough balance in global supply-demand for oil and prices should mean-revert at the marginal price of the most expensive source of oil, which is US shale oil or about $60/BBL.
The above analysis is a very simple one, but clearly illustrates the fallacy of the belief that the US can be oil import free. In reality, even if we could, we shouldn’t because the cost of energy would be far lower with a balanced approach to sourcing oil versus relying solely on our own production.
Factors that would push the US closer to being import free than what’s outlined in this analysis include: Slower development of US shale oil production, higher growth in global oil consumption, faster conversion of existing refining capacity, continued heavy decline in oil exports from countries like Iran, Venezuela, Mexico, etc., among others
The factors that could push the US further away from being import free than what is offered in this analysis include: More rapid increase in Russian and Chinese crude oil production, manipulation of the oil markets by Saudi Arabia, substitution of oil consumption with natural gas consumption, surge in global conservation and fuel efficiency, global warming and regulations to suppress global warming, among others.
One last point that is worth pointing out: To a point, the faster and more the US succeeds in reducing oil demand (likely through transportation fuel efficiency), the harder it will be for the US to achieve energy independence.
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