The International Energy Agency recently announced that the United States will overtake Saudi Arabian oil production by the end of the decade.
The announcement wasn’t merely overdue. It was wrong, Ed Morse, managing director and global head of commodities research at Citigroup Global Markets Inc., told hundreds gathered at Hart Energy’s DUG East Conference & Exhibition in Pittsburgh.
“The US is already there,” Morse said. “The US is an 11 million barrel per day (MMb/d) producing country, not the 6.6 MMb/d producing country that the weekly Department of Energy data indicate.”
Taking into account all exports of oil products, such as natural gas liquids (NGLs), the US is in the driver’s seat, Morse said.
Morse, who served as the US representative at the International Energy Agency (IEA) for President Carter and President Reagan, says the unconventional oil and gas revolution is more than a catch phrase. He predicts climbing production could cause prices to hit a ceiling, change the way oil is benchmarked and create painful times for stalwart oil countries.
Morse said the medium-term outlook for prices should be lower. The Brent forecast is under $100 next year, going down to $85, he said. In the current pricing environment, $90 Brent is a floor price.
However, by decade’s end, $90 Brent will be the “ceiling rather than floor price. There’s too much production,” he said.
Morse doesn’t think oil prices can rise much more because, by his view of cost data, at no time in modern history has energy cost been as high a percentage consumer income and global GDP as it currently is.
“This is a tipping point where if you get a Brent-related price above $120 or $125, something has to give, and it has to be growth,” Morse said.
Low prices won’t be welcomed by US producers, though virtually all unconventional oil can be produced here at $75 or $80 a barrel, he said.
“The only good news for producers in the US is that the current $22 differential between West Texas Sour (WTS), West Texas Intermediate (WTI) and Brent is likely to shrink considerably,” he said.
Reaching something closer to equilibrium of about $5 or $6 a barrel will mean that “relatively speaking there will be higher value in the U.S. market.”
For other countries, the costs will be crippling. Morse said major challenges may be in store for OPEC.
“We’ll see a lot of disruptions continuing because while we pressure the world hydrocarbon economy and benefit from it, others will suffer,” he said. “This is not a game in which everybody wins. There are winners and losers.”
Morse said the losers will be “one-crop” oil countries such as Saudi Arabia, Venezuela, Iraq, Iran, and Russia.
The US, on the other hand, is on pace to enjoy an oil dependence that no other country in the world will be able to challenge, he said.
One reason IEA is behind the curve on US production strength is that oil emerging from Texas, Louisiana, North Dakota, and elsewhere has been ignored.
The results, though, have been dramatic. In 2007, when consumption peaked, the US was a net importer of 12 MMb/d of crude oil and petroleum products. Looking at just a half year’s worth of 2012 data shows imports have dropped to 7.7 MMb/d, Morse said.
“In the process, we’ve moved from being the largest net importer of oil products to the largest net exporter of oil products,” he said.
North American’s imports have dropped by 4 MMb/d more than the total production of Iraq, Iran or Venezuela, Morse said.
Already, this has put pressure on global markets, with the premium on light sweet crude from West Africa sagging. Nigeria, Angola and other West African countries are finding it difficult to sell. Libya and Algeria are also facing hardships, as their premium for light crudes has either reached parity or been discounted.
However, the US’ return to a position of strength in the energy sector has global repercussions.
“At a pace of growth of a 1 MMb/d per year, even if it slows down, that number will have an impact. It’s already having an impact,” Morse said.
Five years ago the US and Canada imported 2.5 MMb/d of West African crude. Today, that’s down to less than 1 MMb/d.
By this time next year, “we will import no light sweet crude from West Africa into the Gulf Coast of the United States,” he said.
Old assumptions about US energy have fallen by the wayside, Morse said. The US appeared on the path to declining oil production, rising consumption, and increasing oil imports. Instead, consumption is falling, production is up and prices down after four straight years in which the US was the fastest growing oil-producing country in the world, Morse said.
The question on people’s minds is whether the costs of discovery and production will stabilize, go up or fall.
The IEA thinks they’re going to go up. Morse says, “I happen to believe that they’re going to go down.”
Morse thinks US production will grow to as much as 7 MMb/d by the end of the decade, while Canadian production will add at least 2.5 MMb/d.
Canadian oil may well become the new benchmark for Pacific Basin oil and OPEC, provided the country builds pipelines west sometime between 2018 and 2020, Morse said.
For the US, the energy industry’s economic consequences could be extraordinary. The industry could spur GDP growth by as much as 3% and add as many as 4 million new jobs, he said.
“The revolution is here,” Morse said. While some people may think it is temporary, “We think it’s here to stay for a good decade.”
Contact the author, Darren Barbee, at email@example.com.