North America: US has its eye on oil independence

For decades, America has worried about Saudi Arabia’s plans for oil production; now Saudi Arabia is starting to worry about the US.

In a reversal of roles, US oil production has begun to rise, and expectations are growing that North America (including Canada, where production is growing even faster) will become an increasingly potent force in world oil markets. Even the Saudis, holders of the world’s largest reserves of crude, are having to pay attention.

In a speech in Riyadh last month, Khalid al-Falih, Saudi Aramco’s chief executive, the kingdom’s national oil company, described what he saw as an age of “abundance” of fossil fuels. That meant ample supplies not just of natural gas unlocked by the shale gas revolution, but also of oil, thanks to reserves being opened up in deep water and the Arctic, and “tight oil” onshore production in the US.

Mr al-Falih is not a disinterested observer. In general, it suits Saudi Arabia to encourage the idea that oil is in plentiful supply for the long term, because it discourages investment in alternatives.

However, Mr al-Falih was engaged in more than just low-cost long-range marketing. For Saudi Aramco, the outlook for oil production in other countries is of vital importance when making its own investment plans, to make sure it avoids global overcapacity in supply that would cause prices to plunge.

Expectations of increased supply from the US and Canada are one reason why Saudi Aramco has decided not to raise its capacity beyond its present target of 12.5m barrels a day.

The US is reversing its four-decade decline in oil production, from a peak in 1971, thanks to increases in production from the deep waters of the Gulf of Mexico and from tight oil: onshore fields previously not thought to be commercially viable because the oil flowed from them too slowly, but have been unlocked by the same ”fracking” techniques used for extracting shale gas. These involve horizontal drilling and the injection of chemicals into the rock strata.

The use of these methods is creating a boom in onshore US oil production, centred for now on North Dakota’s Bakken formation, but with the potential to spread to many other states, from Texas, to Colorado, to Ohio. The effects could be profound. US imports have already fallen to less than 50 per cent of consumption, from a peak in 2005 of 60 per cent.

The International Energy Agency, the think-tank backed by rich countries, has predicted net US production will rise modestly, by about 500,000 barrels a day, by 2035. Others, for example from the National Petroleum Council, an independent advisory body to the federal government, suggest stronger growth is possible.

It is not out of the question that US production could rise so much that it would need to import oil only from Canada, creating “oil independence” for North America. Barring a cataclysm, crude oil and refined products such as petrol would still flow in and out of the US, but in net terms the inflows and outflows would be in balance. In terms of helping strengthen the balance of payments and cushion the impact of oil price shocks, and providing some reassurance over energy security, that would be a very welcome outcome. Can it happen?

One problem is that the breakneck pace of growth is creating strains for the companies and the communities where they operate. With North Dakota’s unemployment at just 3.5 per cent, as one oil industry adviser says: “If you can walk down the street and keep breathing, you can get a job.”

As a result wages are soaring, as are operators’ costs, putting pressure on some to scale back their expansions plans, at least for the time being.

Another issue is public worries over fracking. So far, there has not been a single proved case of contamination of water supplies by fracking fluid while it is being pumped into a well, although there have been cases of pollution from fluids that were not properly disposed of.

A large-scale pollution incident from fracking could be devastating to the shale gas and tight oil industries.

One issue may ultimately prove the most serious: alarm about the resulting greenhouse gas emissions.

There are complex trade-offs involved if increased US oil supply leads to increased oil demand.

The carbon dioxide emission reductions from switching from oil to an alternative fuel may be small to non-existent, if those alternatives are ethanol made from intensively farmed corn, or electricity from coal-fired power plants. So it is not necessarily the case that an economy that continues to use oil at a higher rate will have higher output of carbon dioxide.

Nevertheless, public opinion and lobby groups can put obstacles in the industry’s path.

If the full potential of North America’s oil reserves is to be realised over the decades to come, a policy for managing the effects of greenhouse gases may need to be part of the package.