U.S. optimism over oil production is premature
by Timothy J.A. Passmore
Oct 26, 2012 | 566 views | 0 0 comments | 3 3 recommendations | email to a friend | print
There has been a growing sense of optimism at reports this week regarding U.S. oil production. It seems that due to innovative methods, as well as expanded drilling operations, the U.S. could be on its way to becoming the world’s leading oil producer.

This is no doubt good news for the U.S. for a number of reasons, yet optimism should remain muted when considering a number of other factors.

It is no secret that the U.S. has an oil addiction. Almost 19 million barrels of oil are used in this country every day, more than twice as much as second-place China, and there is little indication that this pattern will change drastically in the near future, according to CIA statistics. As a result, the U.S. has been forced to do two things: import large quantities of oil from other countries (primarily Canada, Saudi Arabia, Mexico and Venezuela), and develop innovative ways of obtaining oil that was previously out of reach.

The U.S. produces an average of 11 million barrels per day. This number has been steadily increasing for the last several years, and in fact more oil has been produced in 2012 than any other year since 1951. This figure, however, still leaves the country around 8 million barrels short every day, resulting in a hefty reliance on foreign oil.

Understanding the importance of being energy self-sufficient, the government and drilling companies have made moves to increase domestic production. Opening up new drilling areas and employing never-before-used techniques have yielded immense results for the U.S. in the last few years. It is now projected that the U.S. will surpass the production levels of Saudi Arabia in the near future, and may be producing as many as 15 million barrels per day by 2020.

This is excellent news for a country that has a much smaller quantity of known reserves than its competitors. In fact, when looking at total reserves by country, the United States comes in 13th place.

The success of America’s drillers must therefore be attributed to something else, and that happens to be the technological advances seen in recent years. U.S. oil companies have found ways to access oil from incredibly hard-to-reach areas, primarily by using a controversial technique known as hydraulic fracturing, or “fracking.” This method is almost literally “like getting blood from a stone,” as oil deposits are extracted from within shale rock formations deep within the earth.

This kind of production will inevitably have positive effects on the U.S. economy, reducing large quantities of imported oil, and consequently reliance on other countries, while providing jobs and boosting businesses that are associated with oil production.

However, this newfound success should be weighed against a number of drawbacks and potential threats. First, increased U.S. oil production will do very little to change the price of gasoline, contrary to what many may hope. As with any commodity, the price of oil will still be dictated by the global market. Prices have skyrocketed in recent years for a number of reasons, not least of which being that demand has soared in East Asian nations as they have become more economically advanced. Furthermore, as production techniques become more expensive (as is the case with fracking), oil companies can ill-afford for the cost of a barrel of oil to drop significantly.

For this reason, prices are likely to hover around $100 a barrel for the foreseeable future. Oil companies have no interest in prices dropping further than this and will usually cut back production to maintain steady prices should that begin to happen.

Second, increased oil production is simply not a sustainable trend. The very reason the U.S. has had to venture to new areas and procure previously inaccessible reserves is because production has seen a steady decline since the 1970s due to depleting reserves and reduced pressure in oil fields. A similar situation has occurred around the world, particularly in Mexico and Venezuela.

The International Energy Agency states that the combined output of the 10 biggest oil fields in the world has dropped by 30 percent from its peak. The U.S. may have the technology to rectify this in the short term, but the new drilling fields will similarly dry up as global oil depletion continues, and new ways and means will be required to satisfy consumption patterns.

The result is potentially serious. Nations will scramble to acquire what is left of global oil reserves and will resort to costly and dangerous means of acquiring it.

For example, a number of countries have begun scouting the earth beneath the Arctic. A recent study by the U.S. Geological Survey found that an estimated 22 percent of untapped oil and natural gas currently sits beneath the Arctic. Oil companies would prefer for much of the ice in that region to melt, giving them easier access for drilling, despite the negative consequences of such large quantities of extra water on the earth’s surface. Furthermore, the fallout of an oil spill similar to that in the Gulf in 2010 could be disastrous, as it would be much more difficult, if not impossible, to gain access to the spill in order to divert it.

Unfortunately, global demand dictates business practices, and our insatiable demand for oil will drive companies to do whatever it takes to acquire more. While there is a trend toward the use of energy-efficient vehicles and the search for alternative sources of energy, much more will have to be done to avoid major problems in the future.

The Department of Energy estimates that by 2035 the U.S. and China will have a combined consumption of 39 million barrels of oil per day, one-third of total global consumption. Oil production to satisfy this demand is simply unsustainable, and while increased production may have short-term benefits for the U.S. economy, there are surely darker days ahead for the oil industry.