Yergin, Burkhard: Declining U.S. Oil Imports Won’t Soften World Oil Prices Unless OPEC Doesn’t Curtail Output

Saudi Arabia is already producing some 800,000 barrels a day fewer than this past spring.

Daily U.S. oil imports—estimated by world oil traders to have fallen by as much as some 1 million barrels this past year—will decline yet further in 2013, according to IHS vice chairman Dr. Dan Yergin and IHS CERA managing director Jim Burkhard. Overall, as a result of new U.S. unconventional-oil production, such as from the Bakken oil play in North Dakota and Montana, net U.S. oil imports are 42% of daily supply today, down from 60% in 2005, says Dr. Nariman Behravesh, IHS chief economist.

Meanwhile, Saudi Arabian output has grown in the midst of “the unconventional oil and gas revolution in the United States, which has pushed up U.S. oil output by 25% since 2008 and turned North Dakota into the second-largest oil-producing state in the United States. It is here where we see the first effects of the unconventional revolution on world energy markets,” Yergin and Burkhard report.

What effect will this and other world oil supply/demand developments have on the international oil scene? Yergin and Burkhard explore this in the “Oil Market Outlook: Non-OPEC’s Big Chance” section of a new report, “Energy and the New Global Industrial Landscape: A Tectonic Shift?” The report was released at the World Economic Forum 2013 annual meeting in Switzerland this past week.

“Indeed, it looks as though 2013 may see a rare occurrence for the world oil market: Supply growth from non-OPEC(-member countries) may exceed the growth in world oil demand. This has happened only four times since 1986 and two of those years were during the Great Recession of 2008–09, when oil demand fell,” Yergin and Burkhard report. “…Oil-supply growth outside of OPEC—led by tight-oil development in the United States—could meet or even exceed the total gain in world oil-demand growth.”

They expect daily supply from non-OPEC-member countries will increase by some 1.1 million barrels this year, “slightly higher than the expected increase in world oil demand.”

So what effect will this have on world oil prices? There might be no change, if OPEC members curtail their production by as much as new, non-OPEC-member production grows, thus eliminating a situation of more excess world oil supply. Yet, the specter of that much go-to, crisis-production capacity could soften the “fear premium” that continues to encourage a $100-plus Brent oil price.

“In this case, there (would be) a moderation in oil prices, but no severe and sustained decline. Spare (daily) production capacity would increase from around 2.8 million barrels in 2012 to about 4 million in 2013.”

They add that an OPEC cutback—at least by Saudi Arabia—is already obvious, with it surfacing some 9.1 million barrels a day in December, down from 9.9 million last spring.

They note too that these scenario forecasts assume meaningful growth in non-OPEC supply. “The non-OPEC-supply story is based on real potential—notably further large gains from the ongoing revival of North American oil production. However, non-OPEC-supply projections have a history of disappointment due to technical and weather-related difficulties and security challenges. A strong year of non-OPEC gains would buck the past decade’s trend of underperformance—but such growth is far from assured.”

This aside, Yergin and Burkhard also comment on whether the unconventional-resource revolution will sweep the world. They expect it will, but slowly. The United States differs from other countries in that it has a large number of private oil companies (“independent” oil companies), mineral rights are held—with small exception—by individuals and private companies rather than by the government, infrastructure for transporting and processing oil exists, and there is a plethora of oilfield services and equipment at the ready.

“Moreover, the development of these resources requires experience, the build-up of knowledge and trial and error. It also involves different…work practices and mindset. Governments also have to create fiscal and regulatory regimes that permit work to go ahead and avoid being overly prescriptive with evolving technologies.”

(In the oilfield, “overly prescriptive” is when the government practically regulates the color of work boot or the zipper length of coveralls.)

Unconventional resources are known in Mexico and Argentina, for example, note Yergin and Burkhard. “Our own research indicates that the resource base in China may be larger than that in the United States. However, it is in very early days, and we believe that it will take several years before significant amounts of unconventional oil and gas begin to appear in other regions.”

The report is available at “Energy and the New Global Industrial Landscape: A Tectonic Shift.”