Dramatic Turnaround in U.S. Energy Supply

imagesCA73TVCK Where are all the “peak oil” believers? The warning that our domestic oil production had peaked and that there was no way to reverse that. There was much pessimism as we were importing more and more of our oil needs. Well, horizontal drilling and hydraulic fracturing has changed all that. Production has risen from 5 million barrels per day  in 2008 to 7.4 million barrels currently. Now the government is reconsidering the ban on oil exports it imposed in the 1970s, as U.S. refineries are now hard put to refine all the oil being produced, (Note, this seems strange since we are also reducing imports, particularly from “unfriendly” sources. However, some of our refineries have long term contracts with relatively cheaper high sulfur heavy crudes, such as Lyondell brings in from Venezuela).

This also highlights the fact that logistics plays a big role in matching oil production sites to refineries. Interestingly, more and more crude oil is being transported by rail rather than by traditional pipelines. That is because fracking has created many new production sites that are not served by existing pipelines, meaning that oil produced in some locations is more attractively priced,  making it possible to use somewhat more costly rail transport to send the oil to refineries that want it or in the future to export terminals.

The same situation applies to natural gas. We now have so much inexpensive gas from fracking that supply has overtaken demand, even with a number of coal-fired power plants shifting to natural gas. This has resulted in gas prices at around $ 3 per million Btu, down from $ 8-10 only a few years ago. Meanwhile, gas prices in Europe and Asia are at these or higher levels, making these destinations attractive export markets. While U.S. manufacturers, such as petrochemical producers, are against allowing exports, which would somewhat erode our industries’ competitive advantage, the Federal Government is starting to grant some export licenses to specified foreign countries.

It is interesting that the Obama administration is strongly supporting  hydraulic fracturing , in spite of environmentalists’ shrill voices raised against this technology. This makes it hard for anti-Obama politicians to be believed when they say that the president is inimical to the oil industry. He can rightly state that during his administration, the U.S. has completely turned around its fossil fuel production to become much more energy self-sufficient.

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