Written by Gavin Kakol
Econintersect: The United State's oil imports have fallen to their lowest level in 25 years, while domestic crude production is expected to rise. Expectations point toward fuel consumption rising moderately.
Can this be the beginning of a new trend of energy independence, where we may again see gasoline near $2.00 a gallon, or is it just a moment to catch our breath before fuel prices rise to intangible new heights pushing us into another recession?
According to the Energy Information Administration (EIA), liquid fuel imports may fall to 6 million barrels daily by 2014. Imports currently stand at 1987 levels, approximately half that of 2007.
EIA's current crude oil and petroleum imports release indicates 312,733 thousand barrels arrived in the U.S. during the month of October. The historically high mark came in August of 2006, when 455,000 barrels were recorded.
Year over year liquid fuel consumption has fallen by 300,000 (1.6 percent) barrels per day. However, total consumption is expected to rise by 70,000 barrels per day in 2013 and 60,000 barrels per day in 2014.
Domestic crude production is expected to expand from its current 6.4 million barrels per day to 7.9 million in 2014. EIA predicts Brent crude will drop from its current $112 a barrel to $99 by 2014. West Texas Intermediate will follow by falling from $94 to $91.
Crude is expected to rise from 18.7 to 20.7 million barrels per day. However, the modest increase won't meet 2011 levels; fuel efficient vehicles, improved roads, and slow growth in the driving age populace have kept consumption down.
Overall "prices at the pump" are down from September ($3.85/gallon) to an average $3.31 /gallon. Consumer's may breath a bitter sigh of relief as gas prices will stabilize near $3.44 and $3.34/gallon in 2013 and 2014 respectively.
Some forecasters, including the EIA, speculate that U.S. oil production may overtake Russia and Saudi Arabia by 2020. Whether or not this comes to pass, numerous analysts believe the United States will be increasingly energy independent.
"The Oil Renaissance"
Market analysts from our guest authorship, EconMatters, recently published an article announcing a new fuel renaissance.
These analysts believe hydraulic fracturing (fracking) and the invisible hand will pressure crude producers to except less profit. According to EconMatters analysts:
OPEC countries still need the overall revenue not the price per say...you can reduce production, your global competitors will love that, less competition for them.
Crude production is considered a "scalable" industry by their measure. EconMatters acknowledges that once sunk costs have been committed, the industry itself can continue to produce at a relatively low price.
EconMatters expects China's stalling economy to drag crude prices downward in the coming decade. However, they also expect continued global momentum for the construction of holding facilities, meaning more jobs!
Expect this new era to manifest itself.... as a result of this sea change in the oil industry.
According to Dr. Kent Moore, a global energy strategist from Money Morning, the is experiencing increased kurtosis- shorter periods with increased volatility.
The oil market, according to Moore, bears the "ratcheting effect", where the market has a basic upward tendency, but there are interrupted downward moments as part of the medium run.
External factors, such a storms play affect to the price of Gasoline and Diesel, but the underlying cause for the depressed market to date according to Moore, is hysteria associated with world economies. Uncertainty over the Eurozone, debt ceilings, and even inventories in Cushing keep prices low.
Disheartening to the motorist, Moore predicts crude unlikely to ever drop back to $40 a barrel (approx. $2.00 per gallon). Recent U.S. geological studies conclude that 3/4 of the world's oil is likely under the Arctic or deep below the sea.
There's no way that an oil company will continue to sell oil at $40 a barrel if it costs them $55 to $75 a barrel to take heavier oil out of the ground.
Shale according to Moore, is not necessarily as cost effective a fuel as it is widely perceived to be. Ever increasing volumes of natural gas has kept its treatment and transportation costs high. In addition shale also poses numerous environmental risks which are likely to impact the price of extraction.
Shale, like all fuel commodities is regulated by world governments. Not all nations will openly embrace it as the United States has; this keeps the fuel from reaching its full profit potential. Moore notes that worldwide demand for shale is:
Hostage to a series of geopolitical economic, and financial considerations...not investment.
$180 a barrel?
The International Monetary Fund's recent report, Geology vs Technology predicts the price of oil could double over the next decade!
IMF's prediction expects growth in demand will induce increased prices; accounting for inflation, the price of oil will reach $180 barrel by decade's end.
To keep pace with GDP growth, oil production must increase. To facilitate this production, investment needs to be poured into procurement; the result is an increased real price of oil.
Perhaps the greatest concern that should follow a near doubling of fuel prices is the possibility of another economic downturn. According to the IMF team, the fuel prices of 2008, "may have played an important role in driving the world economy into a deep recession".
All of this analysis validates that there isn't a conclusive model to predict where fuel prices will trend in the coming years. Remember macroeconomic models alone can't necessarily gauge how governments will react to changing oil prices. Furthermore, these models can't see how technological advances such as Fracking will affect consumption. As with any commodity, investment decisions need to promote diversity. I'll close with a statement from Kent Moore:
As has always been the case, in every pricing cycle of the past decade, central essential goods always weather the storm (hurricane or otherwise). And energy is the most central of all.
- Petrouleum and Other Liquids (US Energy Information Administration, 28 December 2012)
- U.S Oil Imports Fall to 25 Year Low (Ed Crooks, Anna Filfield, Financial Time, 8 January 2013)
- The Future of Oil: Geology Vs Technology (Jaromir Benes, Marcelle Chauvet, Ondra Kamenik, Michael Kumhof, Douglas Laxton, Susanna Mursula, Jack Selody, International Monetary Fund, May 2012)
- Short-Term Energy Outlook (US Energy Information Administration, 8 January 2013)
- The New Era of Oil Renaissance (EconMatters, Global Economic Intersection, 5 January 2013)
- Why Oil Prices Can't(and Won't) Collapse (Kent Moore, Global Economic Intersection, 5 November 2012)
- Ignore the Gloom and Doom Crowd when they Talk About $40 Oil (Kent Moore, Money Morning, 28 August 2012)
- Peak Oil and Price Incentives (James Hamilton, Econbrowser, 13 June 2012)