Photo Credit: Reuters/Lucy Nicholson
Talk of a world hooked on American oil is fanciful, but the conceit is less outlandish than it once might have been. The U.S. will overtake Russia as the world’s largest non-OPEC oil producer by 2015, the International Energy Agency (IEA) says in its latest — and widely watched - semi-annual report on mid-term global oil trends. “A surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the IEA says.
Rising U.S. shale oil output will meet most of the world’s net new oil demand over the next five years, the IEA estimates. In practice, that means U.S. oil imports, excluding those from Canada and Mexico, will shrink. The good news for the global economy is that this should translate into continued lower energy prices: it will ease the global tightness between supply and demand. Crude oil prices have already fallen from a peak of $147 a barrel in 2008 to around $100 a barrel today.
A further implication of what the IEA calls “the North American supply revolution” is that the natural gas extracted from the same shale will provide a cheap competitor to oil, and eventually become used more broadly as fuel for transportation just as it is displacing coal for power generation. There are already signs that the traditional correlation between oil and gas prices has been broken in North America, if not yet Europe.
North America’s growing energy output will also further weaken the pricing power of OPEC members. The IEA says OPEC’s spare capacity will increase by a quarter over the next five years, accounting for the equivalent of an estimated 6.6% of global demand in 2018. With that supply cushion available, if OPEC tries to raise its output, it only risks lowering prices.
The IEA highlights another significant trend: the rise of emerging markets and developing economies. The agency forecasts that oil consumption in these countries will surpass that of the developed economies for the first time in the second quarter of this year and that it will account for 54% of global consumption by 2018.
In its wake will come matching shifts in the global refining industry. India and Saudi Arabia are just two developing economies building new refining capacity. Europe’s refineries are likely to be the losers.
