U.S. Oil in the Global Economy: Markets, Policy, and Politics

This note provides highlights from a one-day CSIS workshop held March 22, 2017, with government, industry, financial, and policy experts exploring the role of U.S. tight oil production in the global energy landscape. The workshop addressed a limited set of key issues concerning the role of U.S. oil in the global markets, and is being followed by two related CSIS workshops dealing with societal and environmental risks in U.S. onshore development, and the global natural gas markets.
Background: The rapid rise in unconventional oil output in the early part of this decade returned the United States to a prominent position as a major oil supplier. Over the course of the past 10 years, U.S. liquid production has risen by over 150 percent as net import dependence has fallen by over 60 percent. The United States is now the world’s largest exporter of refined petroleum products and in 2016/2017 became a net exporter of natural gas. The resource endowment coupled with the success of quick cycle development of light tight oil (LTO) continues to affect global oil markets.
Current Trends and Issues in the Global Oil Markets
To help set the scene for U.S. onshore production, three questions were addressed:
  • What is the state of play in global oil markets?
  • What is the status of U.S. onshore production?
  • What role does U.S. onshore production play in the market?
    After two years of a low-price environment, a potentially bumpy market rebalance is underway.
    The average forecast among Organization of Petroleum Exporting Countries (OPEC), Energy Information Administration (EIA), and International Energy Agency (IEA) data puts world GDP (PPP) growth at 3.4 percent in 2017 and 3.7 percent in 2018. With this, growth in oil demand is forecast to be somewhere between 1.3 and 1.5 million barrels per day (mb/d) in 2017. At the same time, the three organizations estimate a range of 0.4–1.0 mb/d in global supply growth. The EIA, at the high end of the range at 1.0 mb/d in 2017, shows supply and demand rebalancing in Q3 of 2017. Even with global oil supply stocks at a level significantly higher than historical averages, the stronger oil market fundamentals imply higher price forecasts. For example, the EIA forecasts that the price of West Texas Intermediate (WTI) will average $54 in 2017 and $56 in 2018. A variety of factors, some outlined below, could influence the pace of the rebalance throughout the course of this year into next.
  • Figure 1. World GDP, Oil Demand, and Non-OPEC Oil Supply Forecasts for 2017 and 2018 Change 2017 from 2016 Change 2018 from 2017

    World GDP (%)

    World Oil Demand (mb/d)

    Non-OPEC Supply (mb/d)

    3.6

    1.3

    1.3

    3.8

    1.6

    1.3

    na

    na

    na

    3.7

    1.5

    1.3

    World GDP (%)

    World Oil Demand (mb/d)

    Non-OPEC Supply (mb/d)

    IEA

    3.4

    1.3

    0.4

    EIA

    3.4

    1.5

    1.0

    OPE C

    3.3

    1.3

    0.6

    Avg

    3.4

    1.4

    0.7

    Source: IEA, EIA, OPEC April 2017 reports, and IEA Oil 2017 report.
    U.S. tight oil production proved even more resilient than expected during the price downturn and early signs indicate that it has been responsive to the recent upturn in prices.
    U.S. tight oil production remained relatively resilient in the face of low oil prices due to a variety of factors such as leasing and drilling terms, high grading, declining cost of inputs, and productivity improvements. Moreover, even when tight oil production started to decline, U.S. overall production numbers during this period were bolstered by the onset of offshore oil projects coming online—these factors served to mute the expected decline. While the level of resiliency proved stronger than originally expected, oil production was ultimately affected by lower prices, declining by 0.284 mb/d in 2016 from 2015 output levels. With the recent upturn in prices, an average of 0.16 mb/d has been added in Q1 of 2017 from production levels in Q4 of 2016, showcasing a high level of price responsiveness.
    The OPEC decision to cut production bolstered prices with the stated aim to reduce stockpiles.
    The downside facing the market in the short term is that there is still a large amount of stock to work through globally—a process that OPEC producers, along with Russia and several other countries, recently sought to expedite by agreeing to cut 1.8 mb/d of production over the first six months of 2017. The key question is whether U.S. production will simply increase because of higher prices and in the process, dampen a global drawdown in stocks and slow down the global rebalance. OPEC production cuts have been successful so far in reducing levels of stocks globally and have bolstered prices; however, the market has yet to reach a balance between supply and consumption.

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