The United States has been enjoying a sharp increase in domestic oil production over the past several years, nearing its historic peak of 10 million barrels per day that was reached way back in 1970. Oil production had declined by almost half before the recent surge—few had imagined such a reversal was possible.
This boom has prompted industry voices and political leaders to re-examine the federal ban on exports of crude oil (the ban does not include refined petroleum products). The United States continues to be a net importer of petroleum—i.e. we still consume substantially more than we produce. The increase in domestic production has been so rapid, however, it has been difficult to assimilate this new oil stream into the economy, especially given relatively slack U.S. demand. As crude stocks pile up, prices are pushed downward—evidenced by the spread between U.S. and international price benchmarks (Brent etc.).
So the impetus to remove the export ban is largely about getting a better price for the oil America is currently producing. The recent sharp drop in oil prices has made the situation even more uncomfortable for U.S. producers. These, however, are all essentially short-term considerations. But what are the long-term implications for the United States—not only of keeping or removing the export ban, which would not by itself change our status as a net oil importer–but of developing our domestic resources as rapidly as possible? Given the surge in U.S. production is projected to peak within a decade and decline thereafter and given uncertainty about future prices, demand, and supply how might energy resources be stewarded to put the United States in the strongest position down the road?
The experience of other industrial countries that underwent a boom of oil production may be instructive. For example, oil production in the United Kingdom hit a first peak around 1985, followed by a profound dip and a second peak around 2000. UK production has since declined sharply. But total revenue from oil production increased over that period because of substantially higher average prices since 2000 (prices for UK oil reached below $10 a barrel in 1998). In essence, the United Kingdom sold its oil at bargain prices when production volume was greatest, but had much less oil to sell when prices increased. Even after the sharp drop since late 2014, real oil prices are still substantially higher than they were around the turn of the century.
Downward pressure on prices when production is booming has been a recurring problem in the history of the oil industry, and it may never be tamed. Maximizing total revenue is also only one among many considerations. But it is worth weighing whether a more prudent and judicious approach to the development of America’s abundant but nonetheless finite and limited domestic oil resources.
Sooner or later, the United States and the rest of the world will need to figure out how to power our economies on much lower rates of oil consumption and on more expensive oil. America’s relative oil abundance today is a tremendous opportunity to invest in creating an economy equipped for tomorrow. How present-day resources can be appropriately harnessed and invested for the future is a central question that The Energy Xchange will examine in greater depth as we move forward.