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Global demand offsetting surge in U.S. oil production

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It’s basic economics: An increase in the supply of a product coupled with a decrease in demand results in a drop in price.

But that isn’t happening with oil.

Since 2008, oil production in the United States has surged a stunning 28 percent as the controversial practice of fracking unlocks new supplies in North Dakota and Texas. At the same time, use of oil and petroleum products has fallen 4 percent, as Americans switch to more efficient cars.

In theory at least, both of those factors should have pushed the price of crude down. Instead, it’s gone up.

Since bottoming out during the financial crisis, oil futures traded on the New York Mercantile Exchange have nearly tripled in value, climbing from $33.87 per barrel in December 2008 to roughly $95 this month. Although $33.87 was an aberration — a temporary low brought on by economic collapse — oil still costs substantially more now than it did in 2007, before the recession began.

The high price illustrates a brutal truth of today’s interconnected world — oil is a global commodity, bought and sold in a global marketplace. Even if demand falls in the United States, it’s growing in countries such as China and India. And it’s growing fast enough there that booming oil production in the United States can’t keep pace.

“You’re seeing record world demand growth, but supply is not keeping up so much,” said John Felmy, chief economist for the American Petroleum Institute. “It’s a world price. We’re a part of it, but only a part of it.”

Critics say the price paradox undercuts the oil industry’s efforts to drill in more of America’s public lands and coastal waters. Doing so, they say, won’t necessarily help Americans at the gas pump. Indeed, gasoline prices set records last year — nationally, in Texas and in San Antonio, research by the Oil Price Information Service shows.

The nation’s average price for a gallon of regular unleaded gas was $3.60 in 2012; it was $3.44 in Texas and $3.40 in San Antonio.

“It really debunks the myth of ‘Drill, baby, drill,’ that if we just produce more oil, prices will stay low or go lower,” said Michael Marx, director of the Sierra Club‘s Beyond Oil campaign.

Higher domestic production has had a small effect on U.S. oil prices — just not enough to keep them from rising.

Much of the new oil comes from North Dakota and flows into pipelines in the Midwest. But the lines that connect the Midwest to export terminals on the Gulf Coast can’t carry all the additional crude. The result has been a glut of petroleum in one particular place, the pipeline hub of Cushing, Okla. And Cushing is the delivery point for the oil contracts traded on the New York Mercantile Exchange.

So the price of those contracts, for West Texas Intermediate (WTI) crude, is running about $17 below the standard international price, in large part due to the glut in Cushing. But WTI still costs more than $95 per barrel.

Indeed, American oil prices have been rising at the same time that fracking and horizontal drilling have revolutionized the nation’s oil industry.

U.S. oil production peaked at 9.6 million barrels per day in 1970, enjoyed a brief resurgence in the 1980s and then entered a long slide. The bottom came in 2008, when production fell to 5 million barrels per day, according to the U.S. Energy Information Administration.

The rebound has been swift. Last year, U.S. production jumped to 6.4 million barrels per day, according to data released last week by the American Petroleum Institute. Not since 1997 has the country pumped that much oil. And the numbers keep climbing.

Meanwhile, the country’s use of oil and gasoline is falling, albeit slowly. According to the institute, demand for all petroleum products in the United States slid 2 percent in 2012, reaching its lowest point in 16 years. Despite the improving economy, Americans used fewer petroleum products last year than they did in the depths of the recession.

But the world’s thirst for oil, gasoline and diesel continues to grow. And that thirst isn’t easy to slake.

Oil demand in China, for example, rose 3.4 percent last year, reaching 9.68 million barrels per day, according to the Platts energy information service. And 2012 was a relatively rough time for China’s economy, with conditions improving only toward the end of the year. The country’s oil demand hit 10.58 million barrels per day in December, according to Platts.

Against that background, the increase in U.S. oil production doesn’t seem so dramatic, certainly not enough to cut the price.

“It’s not even 1 percent of world production,” Felmy said. “That’s relatively small and can be easily offset.”

San Antonio Express

12 Comments on "Global demand offsetting surge in U.S. oil production"

  1. BillT on Sat, 26th Jan 2013 4:55 am 

    Reality is a bitch!

  2. DC on Sat, 26th Jan 2013 9:20 am 

    Firstly, its a blip not a surge, and secondly, rational people studying this issue have been saying for years, even in the event the US did manage to wring a few more drops of oil out of the ground or ocean, it would have little or no effect on either world oil prices or that all-important(to the amerikan consumer-bot), the price at the ‘pump’.

    Gee, looks like they were right, amazing eh?

  3. Kenz300 on Sat, 26th Jan 2013 3:10 pm 

    China and India are the driving force in oil demand and oil prices. Their billion plus populations and economies are growing between 6 – 8% a year.

  4. cottager on Sat, 26th Jan 2013 3:12 pm 

    BillT, don’t idealise Russia! In Soviet Russia I can imagine you would look like that, with the gun
    like a man defending own land against gas/oil routes, whatever. There is no heaven on the Earth.

  5. Sudhir Jatar on Sat, 26th Jan 2013 3:55 pm 

    In all such analysis, one should factor in the increase in atmospheric and ground water pollution that the unconventional oil causes. Hence, the reduction in green house gases of the US is offset by release of additonal GHG by techniques such as ‘fracking’.
    Additionally, it is not in Saudi interest to let the price of oil fall below, say $90 a barrel because that would leave it short of cash to subsidise products for sale to its citizens. There is the fear of Arab Spring if Saudi government displeases its population.
    So Saudis would reduce their production to keep the international prices high enough.

  6. econ101 on Sat, 26th Jan 2013 5:56 pm 

    Factoring in a zero won’t make any difference in any analysis. The green house gases are a red herring. Every competitor with US oil producers will be a huge proponent of climate change etc because this is an easy an inexpensive way for them to curtail and hamper US competition. Certainly they put no stock in climate change and will never have the EPA shackles on them.

  7. Amvet on Sat, 26th Jan 2013 6:25 pm 

    The big picture is that the developed countries (OECD) are using less oil and the others are using more oil. Now comes the important part. Data from the OECD countries is relatively up to date and reliable. Data from the others is often months late, never produced, and/or not reliable. Even current data does not support an oil production surplus. Look at the EIA data. In the last 16 quarters ending Q4 2012, estimated consumption exceeded estimated production.

  8. Ham on Sat, 26th Jan 2013 8:49 pm 

    ‘Greenhouse gasses are red herring’
    On what Planet does econ101 actually live?
    So Climate change is just really a conspiracy to curtail US bonanza that will last centuries?
    Most of the World’s Scientists are wrong, this is despite the fact they have evidence from a multitude of sources.

    This article tries to blame the rest of the World for over consumption, whilst the US is doing God’s work for producing as much as it can.
    The problem is not the rest of the World that is not the US of A: the American Dream is the problem.

  9. BillT on Sun, 27th Jan 2013 3:01 am 

    Ham econ/sos is insane and greed has blinded him to reality. I have decided to ignore his ignorance. Either he is deluded or on the petro payroll or both.

  10. Other on Sun, 27th Jan 2013 6:17 am 

    If USA has 250 million vehicles for its 300 million people, then Asia will have 3.5 billion vehicles for its 4 billion people.

    So demand for Oil will never cease.
    The reason for only 2% decline in US Petroleum consumption is that still the SUVs sold 5 or 6 years ago were on road, once if they were phased out, then the consumption will decline drastically.

  11. Ham on Sun, 27th Jan 2013 9:54 am 

    BillT You not wrong!

  12. SilentRunning on Sun, 27th Jan 2013 10:16 am 

    How is it possible that the INFINITE amount of oil that the free market and human ingenuity will inevitably produce would EVER be swamped by “rising demand” from mere swelling human numbers?

    Say it can’t be so? For if it so, then our faith in the One True God of “The Free Market”, and it’s Redeemer/Christ “Human Ingenuity” would be shown to be in vain for these would be false gods. It would mean that there are real physical limits that we have to live within.

    But nay, that can’t be so! So evidence to the contrary be damned, gas prices must already be falling to well under 50 cents per gallon. Free fillup with every hot dog purchase at 7-11. (50 gallons max)

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