For the first time in 40 years, the US is exporting oil (other than to Canada, where shipments back and forth are common). At the same time, natural gas exports are now beginning to ship from the US Gulf Coast. Is this the start of a new era in global energy movements? Or just a peculiar set of circumstances as unremarkable as movements of wheat, corn, or copper? As is the case with those commodities, the world’s supply moves to areas of demand in various ever-changing patterns, and is business as usual.
News articles unleashed barrages of hyperbole discussing the export situation. There were announcements that “the worst fears of OPEC and Asian gas exporters are about to come true.” Given most OPEC members are either in the war torn Middle East or scrambling to fund basic social programs, it’s a bit melodramatic to call an outbound tanker of oil and an imminent one of natural gas the realization of nightmares.
The argument in favor of those grandiose comments is that the US shale revolution is about to rewrite global commodity trading patterns. Shale drillers, as the arguments goes, have per the above referenced article, “unlocked record amounts of natural gas [and] are letting those supplies loose into global markets.” The view is that new shale production is so prolific that volumes have swamped demand and are about to flood the world.
The truth is probably somewhat less dramatic. For oil, it is imperative to remember, yet somehow always unmentioned, that the US produces only a portion of its requirements. At the most recent production peak in 2015, the US produced about half the oil it consumes. Even with tankers carrying US crude to international refineries, imports will continue. All that has changed is that the US has re-entered the global oil trade arena. The only thing that prevented US oil exports for the past 40 years was legislation borne out of the 1970s oil shock. That was a time when the US realized, through legislation, that it was being held hostage to foreign producing countries. The dramatic increase in shale oil production has helped alleviate that fear, however with 65 per cent of global oil reserves remaining in the hands of foreign state-owned enterprises, the ‘fear’ should still persist.
In the case of natural gas, US production has increased to the point of outstripping current needs. But that isn’t new, or not new as of this season anyway. Gas exports to Mexico have been increasing for half a decade, and production from the Marcellus region has been imported into Canada as well.
What has received the attention of the media is that perhaps the exports are for once visible, as opposed to moving by annoyingly unidentifiable pipelines. Cheniere Energy is about to export natural gas from a new Sabine Pass terminal in Louisiana. This is important news but mostly because the facility was originally planned to import natural gas. But still, the terminal will eventually export up to 3.5 billion cubic feet per day. While natural gas exporting by ship is a new phenomenon for the US, the first stage of the terminal was over $11 billion to build.
While there certainly is a surplus of natural gas this winter, that has more to do with several summers without major heat waves, several mild winters, a strong El Nino weather pattern this year, no major disruptions from hurricanes, and (not least) hundreds of billions in shale gas development spending over the past 5 years. With all these factors tilting in the same direction at the same time, a surplus of natural gas seems now inevitable.
On the crude oil side, the decision by the Obama administration to lift the ban on crude oil exports came as part of a larger deal that greatly increased spending on green energy (all part of a $1.8 trillion spending bill). Producing states lobbied for repeal of the ban, while some refiners converted the raw news to refined tears as their feedstock would now be priced on global markets rather than a captive home one.
The markets have changed. US production has grown far more than expected a decade ago, and trading patterns have shifted. US fears of crude oil shortages has receded. For natural gas, short- to medium-term production has exceeded current needs and storage capabilities.
Read more insightful analysis from Terry Etam here