Energy independence: Oil production, demand will set prices
Improved technology and drilling methods have allowed the country's natural gas producers over the past five years to flood the market with record natural gas volumes.
As a result, natural gas prices plummeted and the industry has all but abandoned areas rich in dry natural gas.
Now producers are targeting oil, leading some industry observers to warn about a similar result.
“Throughout most of our lifetimes, we have been accustomed to look at the United States as a mature oil province,” said Pavel Molchanov, an analyst for Raymond James Equity Capital Markets in Houston. “The fact that we have dramatically turned the corner to where the United States added more supply than any other country over the past three years is a rather remarkable historic fact.”
He said domestic producers likely will recover an additional 1 million barrels per day each year for at least the next three years.
If those figures hold, America's oil imports could drop to one-quarter of the country's oil usage by 2014 and be effectively eliminated by 2020, Molchanov said.
While there are many benefits to American energy independence, there also are potential problems, he said.
“Until the U.S. oil industry figured out how to produce these unconventional resource plays and opened the door to this dramatic surge in domestic production, our general view was that oil prices would have higher highs and higher lows forever,” Molchanov said. “That is no longer true because we can have almost as much production as we want coming out of this country.”
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Oil is a global market. There is a certain amount available in the world and there is a certain world demand for oil.
An imbalance in either direction can have a dramatic effect on price.
If the U.S. stops importing oil and other countries do not increase their demand by a similar amount, the world will face an oversupply and prices will fall, Molchanov said.
That probably is true in the short run, Molchanov said, but Saudi Arabia, the world's largest oil producer, is unlikely to curtail production indefinitely just so American companies can make more money.
Larry Nichols, executive chairman of Oklahoma City-based Devon Energy Corp., downplayed the concern.
“Oil is a worldwide commodity,” he said. “It is so easy to import and export oil that it is easy to balance the market. If we have a surplus in one area of the world and a deficit in another, we can move it to where it's needed. That's not the case with natural gas.”
While world oil demand has slowed over the past few years because of the global recession, Nichols said demand is likely to pick up again.
“As populations grow and as technology expands, the demand for hydrocarbons will just keep increasing,” he said. “People around the world want to live in houses that are properly heated and cooled and have computers just like in the United States. All of that increases demand.”
Steve Agee, dean of Oklahoma City University's Meinders School of Business, agreed that any price drop likely will be short lived.
“I'm not convinced we'll see prices falling in a dramatic fashion,” he said. “I do think there could be some downward pressure on oil prices until the world economies recover. But we are going to come out of this contraction. The world is going to grow again, and as we do, we will use that oil.”