New U.S. Oil Output Is A Game-Changer For Energy Industry

Investor's Business Daily

Soaring crude oil output in North America will revolutionize the energy market, including how oil is moved, stored and refined across the globe, the International Energy Agency predicted Tuesday.

The impetus is surging shale oil production in the U.S. and Canada.

"North America has set off a supply shock that is sending ripples throughout the world," said IEA Executive Director Maria van der Hoeven, speaking at an energy conference in London, where she was presenting the IEA's annual Medium-Term Oil Market Report. The Paris-based IEA provides energy information, research and advice to governments.

"The good news is that this is helping to ease a market that was relatively tight for several years," van der Hoeven said. "The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves.

'Supply Shock'

The new flow of North American crude is a game-changer.

"The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15 years," the IEA said in its report.

The IEA looks for North American oil output to rise 3.9 million barrels per day from 2012 to 2018, "or nearly two-thirds of total forecast non-OPEC supply growth of 6 mb/d.

This new supply will "cascade" through the world market. Eventually shale production will surge abroad, too, but not for some time.

"Although shale oil development outside North America may not be a large-scale reality during the report's five-year timeframe, the technologies responsible for the boom will increase production from mature, conventional fields — causing companies to reconsider investments in higher-risk areas," the report said.

Fracking Drives Production

The technologies that drive shale oil production are horizontal drilling and hydraulic fracturing, or fracking.

The IEA also pointed out the fast-growing role of developing economies in the industry.

"In virtually every other aspect of the market (other than production), developing economies are in the driver's seat. This quarter, for the first time, non-OECD economies will overtake OECD nations in oil demand," the IEA said. It added that refining capacity in these countries is booming.

World refining capacity will grow even faster than production, rising by 9.5 million bpd by 2018 vs. an 8.4 million bpd rise in global crude output, the IEA said. The big additions will be led by refineries in China and the Middle East, the report said.

With the U.S. producing more and Asia and the Mideast refining more, European refiners stand to lose. They already pay higher prices than the U.S. Competition from new foreign refiners will cap what they can charge for their output. Perhaps worst of all, Europe simply isn't a growing region.

"The IEA made a really dramatic statement today," said Bill O'Neill, partner with commodity consultants Logic Advisors in Upper Saddle River, N.J.

The biggest surprise in the report, O'Neill said, was that it came from the IEA, a group not known for hyperbole or giddy enthusiasm. "The IEA is credible," he said.

But evidence has mounted steadily that new ways to extract oil from shale and other once hard-to-reach deposits are disproving long-held notions about where energy costs are heading and which nations hold the upper hand in the market.

Oil analysts have been increasing their output forecasts for more than a year. The IEA report simply "gives credence to an idea that has been building, that new production in North America is a game-changer," O'Neill said.

Yet even market experts are impressed with how fast the new technologies are changing the oil industry. "Even two years ago, this type of statement would never have been made," O'Neill said.

Mark Zandi, chief economist at Moody's Analytics, says the output bonanza means big benefits for the U.S. economy. For one, surging domestic production will act as a buffer to upside price shocks. This is crucial.

"Every recession we've had since World War II has been preceded by higher oil prices, because we consumed far more than we produced," Zandi said.

Future price shocks will still hurt when we pay at the pump or heat our homes. But at least the money spent by U.S. consumers will stay in the domestic economy, rather than bleed abroad.

Zandi also predicts a big impact on defense spending. The U.S. has spent vast sums to assure free-flowing oil and gas in some unstable, hostile regions — especially the Middle East.

In the future, "More of that onus will shift to users (the biggest energy importers), such as Japan, India and China," Zandi said.

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