U.S. Shale Boom Has Led To Big Payoffs, But Energy Independence Isn't One. Nor Should It Be
Fueled by the shale oil boom, U.S. oil production in November, 2017, was 10.057 million barrels per day (bpd), making it the first time U.S. production exceeded 10 million bpd since 1970 (and breaking 1970’s record). This rate of crude oil production also surpasses that of Saudi Arabia, leaving the U.S. behind only Russia in terms of total crude production.
This impressive shale-led production growth has attracted considerable attention and discussion of what it means for the United States going forward. Much is made of growing U.S. exports of oil (especially to China), declining imports from Saudi Arabia, and the possibility of U.S. “energy independence” – typically defined as no longer being a net importer of crude. Energy independence has been a U.S. energy policy unicorn ever since the oil crises of the 1970s. However, true energy independence is not economically feasible or even desirable, owing to the globalization of crude oil markets. The U.S. shale surge does have economic and policy payoffs for the United States. But energy independence is not one of them.
First, some facts. While the United States is indeed exporting 1.5 million barrels per day of crude oil overseas (9% of U.S. crude oil consumption), a development enabled by the lifting of the crude oil export ban in late 2015, we are still importing 7.6 million bpd (47% of U.S. crude consumption). This makes the United States still a net importer of crude oil. Even accounting for U.S. net exports of petroleum products (3.5 million bpd in November, 2017), the United States remains a net importer of crude oil and petroleum products overall. And we will continue to be so for at least the next several years, even under the most optimistic production forecasts.
So the United States is not yet “energy independent”— we’re still a net importer. But even if we did export more than we imported, being part of the global oil market still exposes us to shocks to oil supply and demand elsewhere in the world. Because it is really cheap to move vast quantities of oil around the world on super tankers, oil prices in the United States can never vary far from prices elsewhere. If that happened, ships would rapidly arbitrage away the price gap. Thus, a supply disruption in, say, the Middle East that substantially increased the oil price there would force up oil prices everywhere, including in the United States, even if we were net exporters. We wouldn’t truly be independent at all.
A response to the above argument might be: “Once we produce enough oil at home to satisfy our own consumption, we can just ban oil exports again, and presto—we’d no longer be exposed to world oil prices, be truly energy independent, and be better off for it.” But that’s a terrible idea. When U.S. firms export crude, they’re doing that because selling oil abroad creates more wealth than either selling that oil to U.S. consumers (at a low price relative to what could be earned exporting) or keeping that oil in the ground. This is the same argument behind why the United States exports grains, planes, and countless other goods and services, even though doing so can increase the prices of those products here at home. Trade makes us better off. We shouldn’t want to be independent.
For now, what the shale boom has done is substantially reduced our net imports of crude oil, from roughly 66% of U.S. consumption ten years ago to 38% by November, 2017. This decrease means that the overall U.S. economy will be less sensitive to oil price shocks than it was in the past—such as the 1973-1974, 1979-1981 and 1990 oil price shocks that are associated with U.S. recessions.
The net effect of an oil price shock is to shift money from oil consuming countries into oil producing countries. So when net imports were 10 million bpd ten years ago, a one dollar increase in the price of oil meant that an additional $10 million would be going out the door every day. The decrease in U.S. net imports substantially blunts this impact. What’s more, with the United States now being a major oil producer, price shocks end up benefiting U.S. companies and all those involved in the oil production chain.
This chain includes a diverse set of people, ranging from royalty-earning landowners (who, according to recent work, earned $39 billion from six major shale plays in 2014), owners of the equity and debt of major shale firms such as Pioneer Resources or EOG Resources, owners of firms like Baker Hughes, Schlumberger and Halliburton that provide oilfield services, and the many employees of these firms (145,700 employees at the start of this year).
So, on average, is an oil price shock now good or bad for the United States? Considering that U.S. oil producers consist of a narrower set of individuals than the broad oil-consuming population of the United States, the negative impacts of an oil price increase on U.S. consumers will be felt more broadly than the positive effects on U.S. producers. We need more research to “follow the money” and learn how quickly increased revenues for producers filter into the broader economy. If they filter slowly or not at all, then price shocks will have adverse distributional consequences, concentrating wealth in the hands of the minority of the U.S. population that actively engages with the oil and gas sector.
Beyond just decreasing the level of U.S. net exports, and therefore our exposure to international oil shocks, the shale boom also likely helps stop large, long-lived shocks from happening in the first place. An important characteristic of shale production is that it can be ramped up quickly relative to other types of oil field developments (for instance, it can take 5 to 10 years to install a deepwater or arctic production facility). This speed allows shale oil production to be 6 to 9 times more responsive to oil prices than production from conventional wells.
Thus, a price shock that took the price to $80/bbl would result in an extra 1.2 million bpd of U.S. production hitting the market within a year. This rapid response ability will limit how long oil price shocks last.
U.S. shale oil’s entrance onto the global stage benefits the United States—and perhaps the world—far more than energy independence ever would. In fact, it may have forever shaken OPEC’s ability to engineer oil prices. OPEC now knows that if it takes oil out of the market to try to jack up the oil price, U.S. shale producers will quickly step in. In this way, the U.S. shale oil boom promotes oil price stability, both in the United States and globally.