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Making Sense of the US Oil Story

We frequently see stories telling us how well the United States is doing at oil extraction. The fact that there are stories in the press about the US wanting to export crude oil adds to the hype. How much of these stories are really true? If we believe the stories, the US is now the largest producer of oil liquids in the world. In fact, it has been the largest producer since the fourth quarter of 2012.

Figure 1. US Total Liquids  production, including crude and condensate, natural gas plant liquids,

Figure 1. US Total Liquids production, including crude and condensate, natural gas plant liquids, “other liquids,” and refinery expansion.

Oil “Extenders”

One of the issues is that a few years ago, the US created a new oil-related grouping, combining valuable products with much less valuable (lower energy content, less dense) products. Using this new grouping, the US was able to show much improved growth in total “oil” supply. The US EIA now calls the grouping “Total Oil Supply.” I refer to it as “Total Liquids,” a name I find more descriptive. Besides “crude and condensate,” the mixture includes “other liquids,” “natural gas plant liquids,” and “refinery expansion.”

“Crude and condensate” is the original grouping. Often, it is just referred to as “crude oil.”

“Other liquids” is primarily ethanol from corn. If we produced coal-to-liquids, it would be in this category as well.

Natural gas plant liquids (NGPL) are the liquids that condense out of natural gas when they are chilled and compressed in the natural gas processing plant.

Refinery expansion occurs when a refinery breaks long chain hydrocarbons into shorter ones. The resulting products take up more volume, but don’t really have more energy content. In some ways, the process is like making whipped cream out of whipping cream–more volume, but not really more product. The new products tend to be more valuable–say, diesel and lubricating oil made from something close to asphalt.

The process of breaking (cracking) long hydrocarbon chains is a valuable service to those producing heavy oils, because it makes valuable products from crude that otherwise would not have been useful for most purposes. The cracking process uses natural gas. Because natural gas in the US is inexpensive relative to its price in most other countries, the US can perform this process more cheaply than other countries. Because of this, it makes financial sense for the US to import heavy crude oil and process it in this way, whether or not US citizens can afford to buy the finished products. (Cracking is not useful on very light oil, such as Bakken oil, since it has primarily short chains to begin with.) If US citizens can’t afford the finished products, they are exported to others.

Whether or not the US should be credited with this expansion of volume is somewhat “iffy,” since the process doesn’t add energy content. Quite a bit of the oil processed in this way uses imported oil, such as oil from the Canadian oil sands.

If we look at the base figure reported by the US Energy Administration, that is, “Crude and Condensate”(Figure 2), the US does not come out as well in original comparison (Figure 1).

Crude and Condensate Prodution US Saudi Russia

The United States makes much greater use of extenders than do Russia and Saudi Arabia. If we calculate the ratio of extenders to the base (crude and condensate), the ratios are as follows:

Figure 3. Extenders as a percentage of crude oil production.

Figure 3. Extenders as a percentage of crude oil production, based on EIA data.

Both Russia and Saudi Arabia have much lower ratios of extenders. For both of these countries, the extenders are Natural Gas Plant Liquids.

Natural Gas Plant Liquids (NGPL), have varied in price. For a while, the price was up with the price of crude, but as supply increased, the US price dropped during 2011 (Figure 4).

Figure 4. Price Comparison per Million Btu for Oil (West Texas Intermediate), Natural gas plant liquids, and natural gas, based on EIA data.

Figure 4. Price Comparison per Million Btu for Oil (West Texas Intermediate), Natural gas plant liquids, and natural gas, based on EIA data.

This drop  in NGPL price occurred because the US market for at least some components of this grouping became saturated. With too much supply for demand, prices dropped. Excess ethane, for example, could be sold to be burned as natural gas, putting a floor under its price. As a result, recent prices seem to be influenced by changes in natural gas prices.

With the drop in NGPL prices, we hear more talk about the need for exports. We don’t really have use for all of the low value products that are being produced, other than to burn them as part of natural gas. Perhaps someone else does. If someone else does, it might get the price back up.

What is the Real US Trend in Production/ Consumption?

The US EIA makes fuel comparisons based on Btu energy content. This approach makes it easy to see how much of our fuel is US produced, and how much is imported (Figure 5).

Figure 5. Comparison of US production and consumption of oil plus NGPLs, based on EIA data.

Figure 5. Comparison of US production and consumption of oil plus NGPLs, based on EIA data.

Production is indeed rising, but it is still far below consumption–about 55% of consumption in 2013. Many articles make this situation confusing.

The emphasis in most news reports is the drop in imports–that is the difference between the blue line and the red line in Figure 5. If we look at the chart, though, we see that a big reason for the drop in imports is a drop in consumption, with the big step down coming in 2007 and 2008. Oil use is associated with jobs. It takes oil to make and transport goods. Also, workers with good jobs can afford cars and the oil to operate their cars. If they remain students forever, they can’t afford cars.

A person can better see the drop in consumption by looking at consumption on a per capita basis.

Figure 6. US per capita oil and Natural Gas Plant Liquids production and consumption, based on EIA data.

Figure 6. US per capita oil and Natural Gas Plant Liquids production and consumption, based on EIA data.

If prices don’t fall, consumers don’t feel the effect of more production. What they do feel the effect of is falling consumption-the top line. Young people especially have been finding it hard to get good paying jobs. With all of their student loans, it is hard to be able to afford to get married and buy a house. This holds down demand for new homes, and all of the things that go into new homes.

If we look at total per capita energy production and consumption in the US, we see even more of this trend. While production per capita is rising, an even bigger issue is falling consumption.

Figure 7. Total per capita energy production and consumption for the US, based on EIA data.

Figure 7. Total per capita energy production and consumption for the US, based on EIA data.

US per capita energy consumption has been dropping since 2000. 2000 is the year of peak US employment, as a percentage of the total population.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 8. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate. (Sorry, not updated.)

With a smaller percentage of the US population employed (and lagging salaries for those employed), US consumers cannot afford to buy as large a quantity of energy products. Rising US oil production is not really helping US consumers, because at its high price, we cannot really afford it.

Rising oil production has not brought down oil price, making it more affordable. In fact, the situation is the reverse–high prices are needed for today’s oil production. It is questionable whether today’s prices are even high enough. Oil companies have to  keep adding debt, to keep extracting oil.  The EIA recently wrote an article about the situation called, As cash flow flattens, major energy companies increase debt, sell assets. Steven Kopits shows this chart of cash flows for Independent Oil Companies in a recent post.

Figure 9. Image by Steven Kopits showing Free Cash Flow of US independent oil and gas producers, from Platts Guest Blog.

Figure 9. Image by Steven Kopits showing Free Cash Flow of US independent oil and gas producers, from Platts Guest Blog.

With negative cash flows, companies have to keep increasing their debt levels–something that eventually becomes impossible.

When those producing the oil see that US oil prices are at times not as high as world oil price (Brent), they hope that selling their crude to world export markets, they will be able to get higher prices for their crude. If they are successful, there will be less crude available sold to US producers, perhaps raising the price of this crude sold in this country as well. The net impact may be higher prices for US consumers, making the US consumers even less able to afford the oil products.

Energy Growth is Needed for Economic Growth

There is a close tie between energy consumption and economic growth. Perhaps my statement “Energy growth is needed for economic growth,” in the header is a little too strong. Perhaps if energy consumption is flat, with the benefit of technological progress and efficiency changes, there can still be economic growth. There is definitely a connection, though. Energy of the right type is needed for every process we can think of–getting to work, shipping goods, operating our computers, heating metals when they are refined.

The problem comes when what we are facing in shrinkage of energy consumption, over and above what can be accommodated by technological progress and efficiency. Figure 7 hints that this is already happening. Then we have danger of a collapsing financial system, as the low energy consumption growth pushes the economy toward contraction. The economy has been held together since 2008 with quantitative easing and zero interest rates. The plan has been to allow consumers more income to spend, by keeping interest rates artificially low. I heard an excellent presentation on this subject recently called Global Financial System on Life Support by Roger Boyd.

Conclusion 

I wrote a post recently called The Absurdity of US Natural Gas Exports. The situation with exports of crude oil is not quite as absurd. The issue is that current oil refineries are not configured for the influx of very light oil. Many of them are busy “cracking” long hydrocarbon chains, often using imported oil as their energy source. If US oil producers have the option of selling their crude oil abroad, perhaps they can get a higher price for it. If US oil producers can get higher prices for their oil, this may very well filter through to higher oil prices for US consumers, and less oil consumption by US consumers, but this is not the concern of oil companies.

A major concern with falling per-capita energy consumption it that the financial system may soon reach limits where it is stretched beyond what it can stand. The economy needs energy growth to grow, but the economy is not getting it.

Content Discussion

Rick Engebretson's picture
Rick Engebretson on August 10, 2014

The brutality and number of wars around the leading oil producing regions seems out of control. The energy myths don’t seem to be fooling everybody. Thanks for your voice of reason.

Gail Tverberg's picture
Gail Tverberg on August 10, 2014

You are welcome. If oil prices were a whole lot higher, the Middle East would be doing better financially and there would be less tendency to fight over what the land and resources available.

 

Gary Tulie's picture
Gary Tulie on August 15, 2014

Economic growth used to be tied intimately with growth in energy consumption until recently when a number of technical advances began to cut into energy growth. 

I will point out several

1. Vehicle fuel consumption / emission standards. 

If I drive a car which does 45mpg rather than a less efficient model which does 25 mpg, then I become more prosperous rather than less. Especially so if the quality, performance etc are at a similar level.

2. Televisions changed over from CRT to Plasma and LED models which use considerably less energy to deliver a larger and better picture. Likewise computer screens.

I would say that having a larger screen with better picture whilst using less power represents growth.

 

3. LED lighting and more efficient luminairs are beginning to make substantial inroads into commercial lighting power consumption, and to a lesser extent into domestic lighting.

Such changes can cut lighting energy consumption by 60 to 90% as compared to legacy technologies. Such a huge leap in efficiency must to an extent decouple economic growth from energy growth.

4. HVAC systems are getting more efficient year by year

 

5. In many jurisdictions, building regulations for energy efficiency in new homes and commercial buildings have been greatly tightened up. In the UK for example, from 2016, new homes will have to be built to efficiency standards comperable to Passivehaus with the additional requirement that they be energy neutral in terms of heating, lighting, and water heating. i.e. that they use a solar array, possibly in conjunction with solar water heating to offest their power and heating use.

The EU as a whole is committed to improving energy efficiency by 20% by 2020. This whilst still aiming to boost the economy. (From 2009 – 2020) representing a 2% per year disconnect between economic growth and energy growth.

Such trends in energy efficiency are accelerating, further decoupling economic and energy growth. What’s more, boosting efficiency has a superb ROI beating just about any other investment available in the market.

  

Bob Meinetz's picture
Bob Meinetz on August 15, 2014

Gail, what evidence do you have that the current flatline in oil consumption has anything to do with the economy? Year-to-year, the GDP has been advancing steadily for the last five years:

The United States GDP advanced 4 percent in the second quarter of 2014, rebounding from a revised 2.1 percent contraction in the previous period. Upturns in private inventory investment and exports and an acceleration in personal consumption and investment contributed to better than expected results.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports increased.

http://www.tradingeconomics.com/united-states/gdp-growth
Gail Tverberg's picture
Gail Tverberg on August 15, 2014

I agree that it is CHEAP energy that we need for an expanding economy.

Reducing demand would work better if we could keep the total number of oil consumers down. In recent years, we have been adding a millions and millions of consumers in China and the rest of Asia. Even if we keep our own consumption down, it is hard to make a dent in world demand. In addition, world population continues to rise.  

Gail Tverberg's picture
Gail Tverberg on August 15, 2014

I don’t disagree. Electricity especially has seen reduced demand thanks to LED bulbs and changes in electronic equipment.

Gary Tulie's picture
Gary Tulie on August 15, 2014

To the best of my knowledge Europe generally does not see cheap energy in quite the same light.

This being the case, most forms of energy especially vehicle fuel are heavily taxed in Europe, and rules regarding vehicle and new building efficiency are far stricter. As a result of this, and differing cultural attitudes to energy use, primary energy use per capita in the USA is 2.3 times as high Europe, with only Iceland and Norway having higher per capita use than the US – in both cases overwhelmingly derived from renewable sources, and being high as a result of a cold winter climate.   

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=44&pid=45&aid=2&cid=regions&syid=2005&eyid=2009&unit=QBTU

The US has around 40% higher GDP/capita adjusted for purchasing power parity than Europe. 

http://www.thenewfederalist.eu/Europe-vs-USA-Whose-Economy-Wins

This implies that the US economy is only around 60% as efficient at generating production per unit of primary energy consumption as Europe.

Interestingly, Germans who pay very high rates for electricity largely as a result of taxes on average spend a roughly similar amount on electricity as your average US consumer as a result of far lower consumption.

Gail Tverberg's picture
Gail Tverberg on August 15, 2014

You will also notice the European economy isn’t doing very well. The European approach isn’t necessarily working very well.

US energy consumption varies greatly by part of the country. http://www.eia.gov/state/rankings/?sid=WY#series/12 The highest energy consumption is in Wyoming (949 million Btu per capita) and Alaska (873 million Btu per capita.) The lowest are Rhode Island (173) and New York (179). If we want to reduce our energy consumption, the easiest way is to stop producing energy products and stop farming.

Admittedly a higher tax on gasoline consumption might reduce the size of US vehicles over time. There will still be a big difference, though, relative to Europe, because of the different business activities, the dstances between towns, and US built infrastructure of houses rather than apartments. 

 

 

 

Gail Tverberg's picture
Gail Tverberg on August 15, 2014

Over time, wages and salaries as a percentage of GDP have tended to fall. Wages amounted to 42.5% of GDP in 2013 compared to 46.9% of GDP in 2000.  Thus, while GDP has been rising, wages haven’t been rising as much. Also, there is increasing disparity of wages. Rich people will drive a little more than poor people, but not proportionate to their incomes.

Insurance companies report that young people are starting out later driving. Lack of job opportunites also play a big role in the decision not to get a car. I have seen studies showing that not having a job is a major reason for not having a car.

 

Gail Tverberg's picture
Gail Tverberg on August 15, 2014

Over time, wages and salaries as a percentage of GDP have tended to fall. Wages amounted to 42.5% of GDP in 2013 compared to 46.9% of GDP in 2000.  Thus, while GDP has been rising, wages haven’t been rising as much. Also, there is increasing disparity of wages. Rich people will drive a little more than poor people, but not proportionate to their incomes.

Insurance companies report that young people are starting out later driving. Lack of job opportunites also play a big role in the decision not to get a car. I have seen studies showing that not having a job is a major reason for not having a car.

 

Joris van Dorp's picture
Joris van Dorp on August 18, 2014

On the contrary.

There is plenty of cheap energy, in the form of coal and shale gas. Expanding use of both have seen the global economy survive in recent years, despite the ravages of peak oil. While good for today’s economy, the use of carbon intensive energy is an assault on the economy of future generations, through the relentless progression of climate change impacts.

Some few hundredths of one percent of humanity have come out winners, being at the receiving end of lavish subsidies for solar panels and electric vehicles. Apparently oblivious to the acute crisis that threatens the fate of billions, these lucky folks have the audacity to proclaim all is well and getting better.

Only nuclear power packs enough punch to save our common future now. Failure to support the nuclear option is the equivalent of mass murder.

 

Lowell Michalove's picture
Lowell Michalove on August 20, 2014

Solar, Wind, Hydroelectric, and every sustainable ‘supply, can only succeed when energy conservation is also utilized. (Only ‘our dwindling fossil fuel supply has the potential to support our waste and overuse of energy.) 

At the end of the day, it’s ALL about Energy.  Yet, America continues to Waste over 70% of the energy it consumes. America’s horrendous energy WASTE is EVERYWHERE !   ( Businesses, industry, offices, municipalities, and SCHOOLS are the worst offenders. )
(1) 100’s of millions of lights burn unnecessarily every day and night.
(2)  We OverLight, OverHeat, OverCool, and OverDRIVE as if it doesn’t matter.
(3) Over packaging is the norm, and recycling is inadequate.  Our landfills are busier than ever.  (Plastics are the cause of most cancers and therefore our most heinous polluter.)

(4) Very few Americans minimize their driving; road congestion is commonplace.  America’s incessant obsession with driving and road construction is the ultimate contradiction to sustainable living.  Mass transit needs to be made FREE (we subsidize all kinds of ‘projects, why not one that helps everybody ! ), SAFE (have Cops ride whenever needed. They can still be utilized elsewhere when needed.), CLEAN, & CONVENIENT(this is the hard part; requires intelligence.)


Solar, Wind, Hydroelectric can only succeed when energy conservation is also utilized. ONLY ‘our dwindling fossil fuel supply has the potential to support our waste and overuse of energy.  Fracking, Off-shore Drilling, Tar Sands, Nuclear Power;  it’s OUR own dumb fault.

The way to eliminate waste and reduce demand for energy is by using the economic impact of taxing energy.  Crude oil must be Federally taxed at $160 per barrel(42 gal) and this ‘energy consumption tax’ be OFFSET by making Federal Income Tax begin at $60k.  Only with a tangible and substantial dollar$$ consequence/reward will there be a plausible incentive to conserve energy.  (Reward the ‘Prius drivers, cyclists, walkers, & mass transit riders. Let the Hummers and other gas guzzlers pay a fair price for their high energy consumption.)

Global warming continues to rapidly increase with our persistent waste and overuse of fossil fuels.  

Our hedonist energy waste is culturally pervasive, flagrant, irresponsible, disgraceful, abominable, sinful, and suicidal ! 

Human extinction will be the reward for our failure to quickly and broadly implement renewable energy supplies and genuine conservation.  
Gail Tverberg's picture
Gail Tverberg on August 20, 2014

You are confused when you say 70% of energy is wasted. By the laws of physics, when you burn fossil fuels to get mechanical energy, you also get waste heat. If the heat is produced in a car’s engine, it is pretty hard to make use of it, except perhaps for heating the car duing winter.

When fossil fuels are burned to provide electricity, waste heat is unavoidably produced. In some cases, it is possible to use this head as “combined heat and power,” but to do this, it is necessary to have some use for the waste heat (like heating homes) nearby to the power plant. 

Most of this inefficiency is “baked in the cake.” It is hard to get rid of it. Energy use is what provides our jobs, and allows us to get to work. It cooks our food. We cannot live on raw food (without a blender–which also requires energy use).

Renewables unfortumately don’t work very well either. The are made using the fossil fuel system, and cannot be maintained without the fossil fuel system. In particular, the electric grid, to which so called renewables are often conected, needs the fossil fuel system to maintain it. We really need our whole syste, or the economy tends to collapse. This is very unfortunate.

Lowell Michalove's picture
Lowell Michalove on August 20, 2014

You did not understand what the words mean. Please reread where i ‘outlined what WASTE means. 

Gary Tulie's picture
Gary Tulie on August 20, 2014

Sorry duplicate posting

Gary Tulie's picture
Gary Tulie on August 20, 2014

That depends on how wasted is defined. You refer to the inevitable loss of useful energy arising from converting fossil fuels to electricity in a heat engine (inefficiencies such as Carnot losses, mechanical and transmission losses). These losses have gradually reduced with improved boiler efficiency, lower friction etc, and appear likely to continue seeing gradual improvement into the future. 

I think however the previous commenter was referring to a combination of poor management of the use of energy – such as keeping more lights and appliances running than necessary, consuming electricity / heat / fuel to no or minimal useful purpose, and use of poor / out of date technology delivering less useful service per unit of energy consumed than could easily be achieved with best practice.

I am not sure about 70% waste of energy in the US economy, however I would say that with US energy use per capita way above that of Europe and Japan, and seeing in the UK every day opportunities to achieve substantial energy use savings without sacrificing utility that there has to be opportunity for a very large reduction in primary energy use per $ of economic production.