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America’s oil finds will not sideline Saudi Arabia

The rise in US output is likely to have little impact and be shortlived, writes Mohammad Al Sabban

There has been celebration in the US over the fact that it will become the leading producer of oil and liquefied natural gas by 2014. Some reports describe as the start of a dramatic reshaping of the global energy industry. Others say the prospect is already reshuffling the cards of international energy diplomacy. US energy independence could be achieved by 2025, rather than 2035 as forecast by the International Energy Agency 2013 Energy Outlook.

However, the celebrations may be premature and the projections exaggerated.

America’s daily oil production was the highest in the world from the time oil was discovered until the mid-1970s. Average US production over that time period was about 10m barrels per day – far higher than the output of Saudi Arabia. However, 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 – it continued to import oil in ever greater quantities. Moreover, output levels have since declined.

Even if the US reaches 11m b/d of crude oil production in 2014, this will not make it the leading producer. The Saudi output is about 11.7m b/d, and poised to increase. Further, Saudi Arabia has a ready spare capacity of an additional 2m b/d of crude. In addition, Saudi Arabia is by far the largest exporter of crude oil and products of crude oil. Its average exports for most of 2013 are about 7.6m b/d; the US exported just 1.9m b/d.

Finally, 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.

The economic challenges facing tight oil are also numerous. They include diminishing rates of return, high depletion rates and the need for higher oil prices to justify investing in new shale wells.

Given these environmental and economic challenges, one must seriously question the sustainability of production of tight oil. One must also question the sustainability of subsidised biofuels that contribute about 10 per cent to the fuels used in the transport sector. With US budget cuts across the board, and the moral issue of the world food crisis, the subsidies for such fuels are likely to be phased out.

In short, this rise in US output is likely to have little impact on energy markets because this boom could be shortlived. Second, it remains highly uncertain that the US will be able to achieve energy independence in coming decades.

What is certain, however, is that developments in the US and other oil-producing nations will affect the investment plans of the leading oil producers, including Saudi Arabia, given the uncertainty created about demand for their output.

Riyadh has already announced that it may not increase its oil production capacity beyond 12.5mbd in the foreseeable future. This is 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. Even if it is premature to hail the US as the world’s leading producer, it could also be too soon to rule out long-term technological improvements that could trigger large-scale tight oil production in the US and worldwide. After all, just five years ago, no one seriously thought the US would be able to produce tight oil.

Nonetheless, 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.

The writer is professor of economics at the King Abdulaziz University in Jeddah. He was senior adviser to the Saudi oil minister

Copyright The Financial Times Limited 2013

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