U.S. Need for Foreign Oil Falls Dramatically

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Over the last seven years, the United States has dramatically reduced its dependence on oil imports. From their peak in 2006, imports have fallen 40% as a result of declining demand (see Figure 1) and strong growth in domestic production of liquid fuels, leading to predictions that the US could reach oil self-sufficiency within 15-20 years.

The role of imports in meeting the country's oil needs is still substantial. But their rapid decline has been a major surprise. Expectations of continued growth in oil imports were based on the premise that domestic oil production had peaked in the early 1970s and was declining irreversibly. It was also believed that it would be politically impossible to tax oil products to a level that would arrest growth in demand, let alone reverse it. (Tax rates on oil products in most European countries are about five times higher than those in the US.)

Instead, both the fall in US oil production and the rise in consumption have been reversed (see Figure 2). As a result, monthly imports(expressed as a 12-month moving average to suppress seasonal effects) peaked in September 2006 at 12.7 million barrels per day (mb/d) and had declined 40% by November 2012 to 7.6mb/d.

Declining demand
Lower demand accounts for 40% of the total decline in net oil imports since 2006. After the financial crisis of 2008 the US economy suffered a sharp contraction, followed by growth at a much slower pace than before the recession. However, economic performance does not explain the phenomenon by itself.

As a result of fuel substitution and improvements in energy efficiency, oil consumption per unit of gross domestic product has declined sharply. This metric, called the 'oil intensity of GDP', has been going down for decades, but since 2006 it has declined approximately 25% faster on average than during the previous ten years. There are two reasons for this: oil has to some extent been displaced by cheaper natural gas in industrial uses and power generation; and energy demand has fallen in the most oil-intensive sectors, especially transport.

The transport sector, which represents 70% of US oil consumption and had been responsible for most of the growth in demand since 1990, accounts for about half of the decline since 2006. Industry, representing less than a quarter of total oil consumption, accounts for 40% of the decline and power generation 10%.

Particularly significant is a change in vehicle usage. The total number of vehicle miles travelled, which had grown at more than 2% per year between 1990 and 2006, peaked in 2007 and has slowly declined since as high oil prices affected behaviour. At the same time, the average fuel efficiency of vehicles on American roads, which had been steadily declining since the late 1980s, has been rising strongly since 2005. The combination of the two factors - fewer miles travelled and more efficient vehicles - has led consumption of gasoline and diesel in transport to decline by about 5% since 2007.

In the industrial sector, meanwhile, total energy consumption is down by 10% since 2006. But with oil prices high and gas prices low, the amount of oil consumed by industry has fallen by 22% while natural gas is up nearly 10%. In power generation, oil has been a relatively marginal fuel for a long time, but since 2006 oil consumption in the sector has declined by 350,000b/d to about 100,000b/d, reducing the share of oil to less than 1%.

Growing production
Rising production of liquid fuels in the United States accounts for 60% of the fall in US oil imports since 2006 and nearly 100% since 2010. Fastest growing has been the output of crude oil, especially in the past two years. Since 2006 US crude oil production has grown by 1.5mb/d to 6.5mb/d, with booming supply of ‘tight oil' (a crude oil found in shale deposits) helping to reverse a decline dating back to the 1970s. (In 1973, at the time of the oil shock, the US produced 9 mb/d of crude.)

Meanwhile, biofuels and liquids produced in natural gas fields, known as natural gas liquids (NGLs), have together added the equivalent of about 1.5mb/d since 2006. Biofuels have benefited from generous subsidies and mandates, while the growth in NGL production is another by-product of the North American shale gas revolution.

The hydraulic fracturing, or 'fracking', technologies responsible for the shale gas revolution have been applied to liquid-rich geological formations to allow for the production of tight oil. The injection of water and additives at very high pressure fractures rocks and increases their permeability to the point that hydrocarbons can flow. Combined with horizontal drilling, hydraulic fracturing has opened up a vast new resource base. Its rapid exploitation has been facilitated by the open and competitive nature of the US oil industry, the availability of finance, and a favourable legal regime in which mineral rights are owned by the surface owner, not the government.

Output of tight oil has risen from zero to 2mb/d in five years, with much of this growth taking place in the past two years. Production takes place mainly in Texas and North Dakota, with various states in the Rocky Mountains making a small but growing contribution. The Bakken formation in North Dakota, part of the much larger Williston Basin, is the focus of much attention and activity. Thousands of wells have been drilled, causing significant pipeline transport bottlenecks, which, in turn, have triggered new infrastructure investment. Bakken shale accounted for 42% of US tight oil production in 2012.

Possible futures
At nearly 8mb/d, the US is still by far the world's largest importer of oil, ahead of China (6mb/d) and Japan (4.5mb/d). However, the International Energy Agency, BP, ExxonMobil and other organisations have forecast that the US, and certainly North America, will become self-sufficient in oil over the next 15 to 20 years. Such forecasts assume a continuation of recent trends: a decline in US oil consumption and strong growth in US and Canadian production of liquid fuels. They may also depend on oil remaining expensive and natural gas remaining cheap.

On the demand side, the market dynamics of recent years have been rooted in consumer responses to a decade of high oil prices, with industry shifting from oil to natural gas, and families buying more fuel-efficient cars and using them less. Even if oil product prices were to fall durably, the decline in gasoline consumption should continue nonetheless with the gradual tightening of rules promoting improved fuel economy for vehicles to 2025, as decided by the Obama Administration in 2011. The fall in oil consumption could be accelerated if energy policy aggressively promoted natural gas vehicles.

On the production side, high prices have stimulated the unlocking of new supply sources. However, in contrast to other forms of crude oil production, in tight oil there is little 'sunk' capital. Therefore, supply is very responsive to price: if prices fall there will be less drilling and lower production.

A key brake on the production of tight oil is the US oil-export ban, which has been in place since the Second World War. It creates a risk of over-supply, with US crude oil prices settling below world prices (mirroring the current situation for natural gas). Exports of refined products derived from imported heavier crudes and processed by Gulf Coast refineries have grown dramatically, but these do not alleviate the oversupply of light crude oil. If US crude exports are not liberalised, new export-oriented light crude refining capacity - and associated pipeline infrastructure - would be needed to balance the market.

The drilling intensity of tight oil production raises environmental challenges. Production from individual wells peaks quickly and then declines sharply, and so a large number of wells are needed to maintain a field's output. In 2012, more than 10,000 wells were drilled in the Bakken formation, compared with 9,000 in the whole of Canada and 6,000 in Russia. Sustaining growth in US tight oil would, therefore, require not only a large resource base but also unconstrained ability to drill in prospective areas. How long this drilling boom can last before it generates serious opposition from local and national environmental groups is an open question. Continued growth in the supply of tight oil over the next 20 years is not impossible but cannot be taken for granted.

Strategic impact
US oil imports will soon have declined by more than 50% from their 2006 peak and, if the consensus is correct, they will fall yet further. In the coming years, one effect of this shift will be to test the degree to which the need for oil imports is a factor behind the US strategic approach to the Middle East.

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