Global Energy - North American revolution
Unlocking North America’s shale formations has been transformational for the United States. The first effects were felt in the natural gas market as Henry Hub prices tumbled from over $13 per one million British thermal units (MMBtu) in 2008 to below $2 per MMBtu in 2012. Now the US is positioned to be a net exporter of natural gas by the end of this decade according to projections from the US Energy Information Administration (EIA). The transformation has been no less astonishing in the oil market. Access to tight oil, the kind found in shale formations, has increased US production from just over 5.0 million barrels per day (MMbbl/d) in 2008 to more than 7.4 MMbbl/d in 2013 – the largest five-year increase in crude production in US history. With production surging and Brent trading at a premium to West Texas Intermediate (WTI), lawmakers are already discussing the possibility of overturning the ban on US exports of raw crude. This policy shift could potentially maximize the benefits to the US economy by allowing the upstream sector to export sweet crude, which trades at a premium, and allowing the downstream sector to import heavier sour barrels, which are sold at a discount. This leverages the strengths of the US refining industry whose facilities are configured to process heavier crude with higher sulfur content. This is all happening as US “peak demand” for petroleum products has receded from more than 22 MMbbl/d in 2005 to 18.9 MMbbl/d in 2013 and long-term demand is expected to stabilize, falling slightly to 18.6 MMbbl/d in 2040.
As a result of growing domestic energy production, the US is becoming more economically independent. The petroleum-related trade deficit shrank from $386 billion in 2008 to $232 billion in 2013.This drop is even more significant than it first appears since high crude oil prices, currently over $100 per barrel, have been exerting upward pressure on these figures.Rising net exports of refined products, made possible by the increased competitiveness of the US refining industry, are also pushing the balance downward. In 2008, the US was a net importer of 1.4 MMbbl/d of refined products, but by 2013, it had become a net exporter of 1.3 MMbbl/d of refined products. Natural gas, however, posted an even more dramatic shift, with the US net natural gas trade deficit shrinking from $26 billion in 2008 to just $4 billion in 2013.
Growing domestic energy production has similarly been a boon to US competitiveness. Whereas offshoring has been a trend in US business for decades, re-shoring is increasingly coming into favor as companies seek to take advantage of low-cost energy and a highly trained workforce while avoiding intellectual property risks and the challenges of managing extended supply chains. The petrochemical industry, which fled the US in favor of lower-cost Middle Eastern countries years ago, is also returning. According to the American Chemistry Council, nearly 150 chemical industry projects totaling over $100 billion have been announced in the US as a result of cost-competitive domestic natural gas prices. Many of these are export-oriented projects that will further help reduce the US trade deficit.
Even the US manufacturing industry, which has struggled over the last couple of decades, is poised for an energy-driven resurgence. The US steel industry, for instance, stands to benefit in two ways: first, from increased demand from the oil and gas industry for drilling equipment and tubular goods; and second, from lower operating costs. As a result, US steel producers, such as Nucor, US Steel, and Vallourec, have announced plans to construct new facilities. Across all sectors, the National Association of Manufacturers estimates the cost savings to manufacturers resulting from shale gas production at around $11 billion per year. This is making the US more competitive internationally. According to AlixPartners, manufacturing in China will be no less expensive than manufacturing in the US by 2015 – both due to lower operating costs in the US and the combination of increasing labor costs, higher energy costs, and a rising Yuan in China.
Given its increased energy and economic independence, several commentators have questioned whether the US will turn inward to concentrate on domestic issues, thus detracting from its focus on foreign policy. Some believe this could mean changes in the relative balance of US national interests across China, Russia, the Middle East and Africa.
At the same time, global energy trade, which once bound importers and exporters into mutually beneficial long-term agreements, is increasingly characterized by a growing combination of short-term contracts and ‘out clauses’ that leave negotiation room under pre-defined circumstances. This movement away from long-term agreements is transforming international trade relationships into “marriages of convenience” that can be altered quickly or dissolved as conditions change. However, the recently announced long-term gas supply agreement between Russia and China could be an exception that proves the rule.