IEA findings: Financial Times and theoilandgasworld analysis

Writing in the Financial Times, Mohammad Al Sabban, a former senior oil adviser to the Saudi oil minister, has thrown cold water on the optimism over the IEA’s prediction that the US will be the world’s top oil producer by 2015. Although some reports have described the news as the start of a dramatic reshaping of the global energy industry, with some excitably suggesting that the card of international energy diplomacy are being reshuffled. However, according to Al Sabban, “the celebrations may be premature and the projections exaggerated” for the following reasons:

  • America’s daily oil production was the highest in the world until the mid-1970s, averaging about 10m barrels per day, which was far higher than the output of Saudi Arabia. That level of daily oil production did not garner the US any significant influence in international oil markets. Nor did it improve US energy security as it continued to import oil.
  • Most of the increase in US production comes from tight oil that is produced primarily in two areas: Bakken in North Dakota and Eagle Ford in Texas. However, the US Energy Information Administration acknowledged in its latest report: “Tight oil development is still at an early stage, and the outlook is highly uncertain.” This is because, for the production of tight oil to continue at increasing rates, the industry must overcome environmental challenges.
  • According to the 2012 report from the US Environmental Protection Agency, fracking produced 280bn gallons of toxic wastewater, 45,000 tons of air pollution and 100m metric tons of carbon dioxide-equivalent global warming pollution.
  • There are also economic challenges facing tight oil, including diminishing rates of return, high depletion rates and the need for higher oil prices to justify investing in new shale wells.

In short, al Sabban believes that a rise in US output is likely to have little impact on energy markets because the boom could be short-lived; it is not certain that the US will be able to achieve energy independence in the near future. However, he does think that developments in the US and other oil-producing nations will affect the investment plans of the leading oil producers, including Saudi Arabia.Al-Sabban concludes by claiming that Saudi Arabia will continue to be the most influential energy producer for years to come because of its record of moderate pricing and as the most dependable, secure source of oil.

This may be true, but I think he is overstating Saudi’s stranglehold on the market and underestimating the US’s eagerness to move away from dependence on foreign exports. Previously importing oil had been the cheaper option – that is no longer the case, and with the US refocusing its economy on production, exporting oil could become its new national industry. In addition, there is uncertainty about demand for the Saudi output: the Saudi government recently announced that it may not increase its oil production capacity beyond 12.5m b/d in the foreseeable future as a reaction to the energy production boom in the US and elsewhere, coupled with a decline in demand for oil in OECD countries since the second half of the past decade. Although this may not be long term, it is undeniable that over the next decade, we are going to see a considerable decline in the importance of Middle East and Russian oil production.


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