HOUSTON
— A substantial rise in oil prices in recent months has led to a
resurgence in American oil production, enabling the country to challenge
the dominance of Saudi Arabia and dampen price pressures at the pump.
The
success has come in the face of efforts by Saudi Arabia and its oil
allies to undercut the shale drilling spree in the United States. Those
strategies backfired and ultimately ended up benefiting the oil
industry.
Overcoming
three years of slumping prices proved the resiliency of the shale boom.
Energy companies and their financial backers were able to weather
market turmoil — and the maneuvers of the global oil cartel — by
adjusting exploration and extraction techniques.
After
a painful shakeout in the industry that included scores of bankruptcies
and a significant loss of jobs, a steadier shale-drilling industry is
arising, anchored by better-financed companies.
With
the price of West Texas intermediate crude above $65 a barrel, a level
not seen in almost three years, the United States is becoming a dominant
producer. It is able to outflank competitors in supplying growing
global markets, particularly China and India, while slashing imports
from the Middle East and North Africa.
This
year, the United States is expected to surpass Saudi Arabia and to
rival Russia as the world’s leader, with record output of over 10
million barrels a day, according to the International Energy Agency.
“This
is a 180-degree turn for the United States and the impacts are being
felt around the world,” said Daniel Yergin, the economic historian and
author of “The Prize: The Epic Quest for Oil, Money and Power.” “This
not only contributes to U.S. energy security but also contributes to
world energy security by bringing new supplies to the world.”
Catching Up
Forecasts show that the United States could surpass Saudi
Arabia as an oil producer this year, with output exceeding 10 million
barrels a day.
12
million barrels a day
Russia
10
Saudi Arabia
United States
8
Crude oil
production
6
Iraq
4
Canada
Brazil
2
0
’12
’13
’14
’15
’16
’17
At
the same time, the United States is becoming a major exporter of
natural gas, another outgrowth of the shale revolution, undercutting
Russian energy dominance over Eastern Europe.
The
improving energy picture comes as the Trump administration is
attempting to increase offshore drilling and loosen other regulations on
fossil fuel development. But just as the surge in oil and gas
production in shale fields during the Barack Obama administration had
little to do with Washington, the current rise is the result of private
companies responding to global markets.
Shale
fields can be developed relatively quickly and at modest costs relative
to the giant projects, whether on land or offshore, that were once
favored by big oil companies. That makes it easier to turn investment
spigots on or off to adjust to market fluctuations. Companies like Exxon
Mobil and Chevron are putting increasing amounts of capital in shale
fields, particularly in West Texas and New Mexico.
The
results go far beyond the economic, offering Washington strategic
weapons once unthinkable. The United States and its allies now have a
supply cushion at a time when political turmoil in Venezuela, Libya and
Nigeria is threatening to interrupt flows to markets.
Only
a few years ago, such threats — along with a recent pipeline failure in
the North Sea and storms in the Gulf of Mexico — would have sent the
price of crude soaring. Instead, the rise has been muted, and gasoline
at the pump remains below $2.60 a gallon across most of the United
States.
The
new energy power also relieves pressure on Washington to act militarily
if tensions between Iran and Saudi Arabia break out into war. And it
gives Washington the leeway to apply sanctions on other producers — as
it has in Russia, and may in Iran or Venezuela — with far less risk to
the global economy.
It
is a striking contrast to the 1970s, when Arab oil boycotts forced
motorists to line up for blocks to fill their tanks and the economy went
into a tailspin. Even more recently, during the presidency of George W.
Bush, domestic oil output was declining so rapidly that the country set
a course to replace oil with biofuels like ethanol.
Many
environmentalists argue that by increasing oil and gas supplies and
lowering prices for consumers, shale drilling is extending the life of
fossil fuels to the detriment of the environment and the development of
cleaner energy.
The
shale drilling revolution has remade the global energy market, with
imports from members of the Organization of the Petroleum Exporting
Countries plunging by 20 percent from late 2016 to late 2017. At the
same time, exports rose by hundreds of thousands of barrels a day.
Nothing
like the current situation was foreseen in late 2014, when rising
domestic production began weighing on global oil prices.
In
response, Saudi Arabia led OPEC in a new direction. Instead of
throttling back to support prices as the cartel had done so often, it
left the market alone and even increased production for a time.
Prices
fell below $40 a barrel, as the Saudis and their allies hoped to drive
American operations out of business by making shale drilling
uneconomical. American exploration quickly dropped, but the price
squeeze made companies more innovative in the use of drilling
technologies, robotics and sensors to maximize output and reduce costs.
While
scores of smaller companies went out of business, the survivors
lengthened horizontal wells to yield more oil, and used clever hedging
and drilling strategies to maximize profits even when prices slumped.
The
response surprised the global oil community. OPEC, Russia and allied
producing countries changed course and began cutting back again in 2016.
“OPEC
missed the point,” said René Ortiz, a former OPEC secretary general and
former Ecuadorean energy minister. “They thought they could recover the
U.S. market by bringing the prices down. Now the U.S. has gained the
leading position in the world oil market regardless of what OPEC does.”
“This displacement of Saudi oil, Nigerian oil, Libyan oil and Venezuelan oil,” Mr. Ortiz concluded, “was never anticipated.”
A week ago, OPEC leaders met in Oman to discuss a probable extension of production cuts into 2019 to support prices. Their biggest obstacle is the United States.
Technological
advances unlocking oil from tight rocks like shale has led to a
drilling frenzy enabling a doubling of output in a decade, transforming
unlikely places like North Dakota and New Mexico into world class
petroleum hubs. Pipelines are being built across Texas to serve ports
where oil can be pumped onto tankers headed for China, India and other
markets.
Domestic
production last year averaged 9.3 million barrels a day, and the Energy
Department projects that the figure will climb to 10.3 million barrels a
day this year, surpassing the record set in 1970. In the meantime,
since a 40-year export ban was lifted in 2015, exports of American oil
have risen to roughly two million barrels a day — more than many OPEC
members.
The department projects an additional increase in domestic production of 500,000 barrels a day in 2019.
Concerns
over climate change as well as the growing popularity of electric cars
and the eventual aging of the best shale fields will probably curb
production and demand over the next few decades. But in the short term,
the boom has changed the landscape.
The
Energy Department projects that the recent surge will hold the price of
Brent crude, the global benchmark, to $60 a barrel in 2018 and $61 a
barrel in 2019 — a modest increase from $54 last year. (The Brent price
rose above $70 a barrel this month, but few analysts see a return to
$100-a-barrel oil.)
The
emerging order in the energy realm is a stable balance of power. Saudi
Arabia, which essentially runs OPEC, has put a floor under the oil price
— probably around $50 a barrel — with its limits on output and exports
over the last four years. But now the United States, by the sheer force
of its production, the supremacy of its technology, and an unmatched
pipeline, refinery and storage structure, has put a ceiling to the
price.
Experts
note that when oil climbs to $60 a barrel and higher, as it has lately,
a drilling rush commences — the national rig count has climbed by over a
third in the last year — promising to refill domestic and even global
energy inventories. Only a major war or other disruption is likely to
send prices soaring.
“We
have all suffered these depressed prices over the last two years and we
are excited to see the new prices and we will respond accordingly,”
said Harald Jordan, vice president for engineering at Peak Energy, a
Colorado-based producer. “You will see rig activity continue to
increase.”
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