This post takes a zoomed out view on petroleum as it affects the U.S. and the world, today and for the next several years. The global supply / demand balance for petroleum and related products has changed dramatically over the last several months and continues to change, affecting almost everybody and everybody’s business. With the approach of the Paris meetings on climate change – hence fossil fuels, including petroleum – a pragmatic approach to petroleum and policy may offer some prospective.
Petroleum in America
The term “petroleum” (literally “rock oil”) refers to crude oil. Petroleum consists of a broad collection of hydrocarbon molecules. Petroleum refineries separate these molecules useful fractions (such as gasoline) and process less useful molecules by splitting or rearranging them to produce more of the useful kinds. Petroleum is a natural material that varies significantly from source to source. Refiners are willing to pay more for petroleum that has lots of useful molecules and little difficult to process residues (sulfur, for instance). Petroleum provides more than a third of the primary energy consumed in America. Far and away, the principle use for refined petroleum is to fuel transportation.
Importantly, petroleum (crude oil) is a globalized commodity with a globalized pricing structure. The ease of transporting crude oil internationally makes it so. Until recently, the global pricing of crude oil was determined by an international cartel
For present purposes, it is useful to include natural gas in the discussion, taking care not to confuse natural gas with petroleum. Natural gas, unlike petroleum, is not readily transported, except by pipeline. Consequently, pricing for natural gas varies significantly from place to place, depending on access. In the past, natural gas, generally speaking, was limited by available supplies and natural gas pricing more or less tracked that of petroleum.
Hydraulic fracturing, an innovation in drilling oil and gas wells, changed everything. “Fracking” allowed natural gas and petroleum production to increase substantially here in the U.S. over the last several years. The huge increase in U.S. domestic oil and gas production resulted in a decrease in global petroleum prices by more than half, as traditional petroleum exporting countries scramble to protect world market share.
Supply Dependency and the Trade Deficit
The recent and dramatic changes in global petroleum and natural gas supply / demand balances have several implications for Americans and for America:
>> For American drivers, cheaper crude translates into substantially lower prices gasoline prices.
>> For residential and commercial customers, plentiful natural gas results in lower heating costs.
>> For electric utilities, plentiful natural gas allows migration from coal without dramatically increasing fuel costs.
>> For American manufacturers, plentiful natural gas provides energy cost savings and a low cost source for some petrochemical products – especially ethylene and propylene – based petrochemicals and polymers.
>> For just about all Americans, lower crude oil prices result in lower transportation cost, be it by rail, truck, air or sea.
>> Petroleum imports have more a major factor in American’s persistent foreign trade deficits. Until recently, when America imported a boatload of crude oil, America exported a corresponding boatload of greenback dollars. Now, if and when America imports a boatload of crude oil, America exports less than half a boatload of greenbacks. The rest stay here in America and circulate through our domestic economy. It is difficult to over emphasize how important those additional greenbacks can be, especially in a stressed out economy.
In 2009, when the U.S. economy tanked, global crude prices followed, then quickly recovered. Sometime in mid – 2014, U.S. petroleum and natural gas supplies reached a tipping point and prices began to drop. It is my contention that the export of greenbacks for crude oil played a significant role in America’s prolonged recovery from the Great Recession. Further, I contend that sharp reduction in the export of greenbacks in 2014 was a primary factor, if not the primary factor in the recovery the U.S. has experienced over the last 12 – 15 months.
>> Even more importantly for all Americans, the new global supply / demand balances for petroleum and natural gas provide a genuine opportunity to become and remain independent from foreign suppliers. “Independent” doesn’t mean that American should not buy foreign crude oil. It does mean that America does not have to buy foreign oil. Supply independence reduces the probability of oil price shocks. Further, supply independence significantly reduces the influence of the Middle East in American foreign policy.
In my view, energy policy and the present opportunity to become and remain energy independent should be a major – if not the major – issue in the upcoming elections.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.
Oil well image credit: http://www.dreamstime.com/-image23393490