The chart of the week is from Ryan Connelly, Senior Analyst for Global Economics:
“The US shale revolution has led to a dramatic increase in US crude production. The US is currently producing just under 10mm bp/d of crude oil – almost 10% of global demand. Due to fundamental factors and a switch to more efficient technologies, US oil consumption will probably peak in 2018, and decline going forward. Because of low demand growth and fast supply growth in the US, the majority of new oil production has gone directly to export market share. The US still has a lot more refining capacity than production, so it will continue to import crude oil – but it will then export refined products. According to some estimates, the US will become a net exporter by the end of 2018.
There are so many interesting implications to this change. There’s two particularly interesting shifts to the geopolitical landscape. On one hand, the US becomes far less reliant on the Middle East for crude oil imports. Since WWII, states in the MENA region – Saudi Arabia, in particular – have been key strategic allies of the US. The US and Saudi have maintained good diplomatic relations despite many obvious points of tension. The decline in US reliance on Saudi oil makes this relationship somewhat more vulnerable to disruption. On the other hand, these new US exports are going to flow to the fastest growing regions in the world – like China and India, who are heavily reliant on imported oil. This shifts the direction of US economic activity away from the Atlantic to the Pacific, and will create concerns from China for its own energy security if it becomes reliant on US oil imports.
These changes are mainly a positive for most multinationals and most countries. Oil supply growth will lead to lower prices. FSG forecasts a $60 Brent and $56 WTI average prices in 2018, and we expect prices to stay right between $50-$60 over the next decade. Because the US is politically stable, the total supply of oil will be a little less prone to supply outages. And because US supply is provided to markets by many private firms seeking to maximize profits, and because of laws in the US that prevent private sector collusion, US producers will not be able to coordinate with OPEC to reduce supply and push up prices. These are all good things. But such a monumental shift in the geography of global oil movements may lead to other, unanticipated changes over the medium-term.”
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