Oil rigs and a flare are visible at this Hess production site in North Dakota.
The International Energy Agency made headlines Monday when it declared in its World Energy Outlook 2017 that the U.S. could be a net exporter of oil within a decade. The IEA also projected that the U.S. is set to become the world’s dominant oil and gas production leader for decades.
Is that a realistic assessment? Is the U.S. on the cusp of achieving energy independence for the first time in nearly 70 years?
A dozen years ago, the notion that the U.S. could achieve energy independence would have drawn scoffs from most energy analysts (including myself). After all, U.S. oil production had been in decline since reaching a peak of 9.6 million barrels per day (BPD) in 1970. By 2005, U.S. oil production had fallen to 5.2 million barrels per day.
But U.S oil demand continued to grow, so crude oil imports soared as production declined. By 2005, net imports of crude oil and finished products like gasoline had reached a record 12.5 million BPD.
U.S. energy security hit an all-time low in 2005, but the situation has changed dramatically since then. Oil and gas drillers had been experimenting with combining hydraulic fracturing with horizontal drilling, and their success ushered in the shale oil and gas boom.
Natural gas production turned upward in 2006 and would rise by 50% over the next decade. Oil production followed in 2009 and added more than 4 million BDP of new production by 2015.
Meanwhile, U.S. crude oil demand, which had exceeded 20 million BPD from 2003 to 2007, ultimately softened in response to rising oil prices. Demand began to decline in 2008, and within five years had fallen by 2 million BPD.
The combination of surging supplies and slumping demand caused U.S. oil imports to begin falling. The new oil supplies from the U.S. shale plays proved to be a bonanza for U.S. refiners, which processed the oil and began to export some of the finished products.
The U.S. became a net exporter of finished products (e.g., diesel, gasoline, etc.) in 2011 for the first time since 1949. Today, the U.S. still imports about 8 million BPD of oil, but we also export approximately 2 million BPD of crude oil and natural gas liquids, as well as more than 3 million BPD of finished products.
The overall effect is that net U.S. imports of crude oil and finished products fell from a high of 12.5 million BPD in 2005 to less than 5 million BPD in 2015. U.S. energy security is at its highest level since the 1980s, but could the U.S. achieve full energy independence?
It depends on how it is defined. Between 2008 and 2014, net imports fell by 6 million BPD at a fairly steady pace. The U.S. was on a trajectory to achieve zero net imports by 2019, which would have effectively meant energy independence. The U.S. would have still imported oil as it does now, but it was on pace to export enough finished products to net out to zero.
Does that amount to energy independence? Some would argue “no,” since we would still import oil in that situation. By that standard, we will never truly be independent because there will always be economic reasons to import some oil even if, at the same time, we export oil and finished products. For example, some U.S. refineries near Canada may always opt for Canadian crude.
But if the metric is that our petroleum exports are equal to or greater than our imports, then that is achievable. Had oil prices not collapsed in 2014, U.S. shale oil production would probably have continued to grow at a rapid pace for several more years. If the trends before 2014 had continued for five more years, and as long as U.S. demand remained relatively flat, then 2019 could have been the year energy independence was achieved.
But the oil price collapse caused U.S. oil production to dip, and net imports trended slightly higher in 2016. U.S. oil production is once again on the rise, but demand is also climbing higher.
Still, the remarkable decline in net imports as the shale oil boom began to pay dividends shows that the notion of energy independence isn’t as far-fetched as it seemed a decade ago. If oil prices gain strength, that should both boost production and make alternatives like electric vehicles more attractive, which would help push the U.S. closer to energy independence.
My verdict on the IEA’s projection? It is certainly possible but will likely require oil prices to rise from current levels.