By JONATHAN FAHEY
Driven
by high prices and new drilling methods, U.S. production of crude and
other liquid hydrocarbons is on track to rise 7 percent this year to an
average of 10.9 million barrels per day. This will be the fourth
straight year of crude increases and the biggest single-year gain since
1951.
The boom has surprised even the experts.
"Five years
ago, if I or anyone had predicted today's production growth, people
would have thought we were crazy," says Jim Burkhard, head of oil
markets research at IHS CERA, an energy consulting firm.
The
Energy Department forecasts that U.S. production of crude and other
liquid hydrocarbons, which includes biofuels, will average 11.4 million
barrels per day next year. That would be a record for the U.S. and just
below Saudi Arabia's output of 11.6 million barrels. Citibank forecasts
U.S. production could reach 13 million to 15 million barrels per day by
2020, helping to make North America "the new Middle East."
The
last year the U.S. was the world's largest producer was 2002, after the
Saudis drastically cut production because of low oil prices in the
aftermath of 9/11. Since then, the Saudis and the Russians have been the
world leaders.
The United States will still need to import lots
of oil in the years ahead. Americans use 18.7 million barrels per day.
But thanks to the growth in domestic production and the improving fuel
efficiency of the nation's cars and trucks, imports could fall by half
by the end of the decade.
The increase in production hasn't
translated to cheaper gasoline at the pump, and prices are expected to
stay relatively high for the next few years because of growing demand
for oil in developing nations and political instability in the Middle
East and North Africa.
Still, producing more oil domestically, and importing less, gives the economy a significant boost.
The
companies profiting range from independent drillers to large
international oil companies such as Royal Dutch Shell, which
increasingly see the U.S. as one of the most promising places to drill.
ExxonMobil agreed last month to spend $1.6 billion to increase its U.S.
oil holdings.
Increased drilling is driving economic growth in
states such as North Dakota, Oklahoma, Wyoming, Montana and Texas, all
of which have unemployment rates far below the national average of 7.8
percent. North Dakota is at 3 percent; Oklahoma, 5.2.
Businesses
that serve the oil industry, such as steel companies that supply
drilling pipe and railroads that transport oil, aren't the only ones
benefiting. Homebuilders, auto dealers and retailers in energy-producing
states are also getting a lift.
IHS says the oil and gas drilling
boom, which already supports 1.7 million jobs, will lead to the
creation of 1.3 million jobs across the U.S. economy by the end of the
decade.
"It's the most important change to the economy since the
advent of personal computers pushed up productivity in the 1990s," says
economist Philip Verleger, a visiting fellow at the Peterson Institute
of International Economics.
The major factor driving domestic
production higher is a newfound ability to squeeze oil out of rock once
thought too difficult and expensive to tap. Drillers have learned to
drill horizontally into long, thin seams of shale and other rock that
holds oil, instead of searching for rare underground pools of
hydrocarbons that have accumulated over millions of years.
To free
the oil and gas from the rock, drillers crack it open by pumping water,
sand and chemicals into the ground at high pressure, a process is known
as hydraulic fracturing, or "fracking."
While expanded use of the
method has unlocked enormous reserves of oil and gas, it has also
raised concerns that contaminated water produced in the process could
leak into drinking water.
The surge in oil production has other roots, as well:
—
A long period of high oil prices has given drillers the cash and the
motivation to spend the large sums required to develop new techniques
and search new places for oil. Over the past decade, oil has averaged
$69 a barrel. During the previous decade, it averaged $21.
—
Production in the Gulf of Mexico, which slowed after BP's 2010 well
disaster and oil spill, has begun to climb again. Huge recent finds
there are expected to help growth continue.
— A natural gas glut
forced drillers to dramatically slow natural gas exploration beginning
about a year ago. Drillers suddenly had plenty of equipment and workers
to shift to oil.
The most prolific of the new shale formations are
in North Dakota and Texas. Activity is also rising in Oklahoma,
Colorado, Ohio and other states.
Production from shale formations
is expected to grow from 1.6 million barrels per day this year to 4.2
million barrels per day by 2020, according to Wood Mackenzie, an energy
consulting firm. That means these new formations will yield more oil by
2020 than major oil suppliers such as Iran and Canada produce today.
U.S.
oil and liquids production reached a peak of 11.2 million barrels per
day in 1985, when Alaskan fields were producing enormous amounts of
crude, then began a long decline. From 1986 through 2008, crude
production fell every year but one, dropping by 44 percent over that
period. The United States imported nearly 60 percent of the oil it
burned in 2006.
By the end of this year, U.S. crude output will be
at its highest level since 1998 and oil imports will be lower than at
any time since 1992, at 41 percent of consumption.
"It's a stunning turnaround," Burkhard says.
Whether
the U.S. supplants Saudi Arabia as the world's biggest producer will
depend on the price of oil and Saudi production in the years ahead.
Saudi Arabia sits on the world's largest reserves of oil, and it raises
and lowers production to try to keep oil prices steady. Saudi output is
expected to remain about flat between now and 2017, according to the
International Energy Agency.
But Saudi oil is cheap to tap, while
the methods needed to tap U.S. oil are very expensive. If the price of
oil falls below $75 per barrel, drillers in the U.S. will almost
certainly begin to cut back.
The International Energy Agency
forecasts that global oil prices, which have averaged $107 per barrel
this year, will slip to an average of $89 over the next five years — not
a big enough drop to lead companies to cut back on exploration deeply.
Nor
are they expected to fall enough to bring back the days of cheap
gasoline. Still, more of the money that Americans spend at filling
stations will flow to domestic drillers, which are then more likely to
buy equipment here and hire more U.S. workers.
"Drivers will have to pay high prices, sure, but at least they'll have a job," Verleger says.
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