What the Frack?

On January 17th of this year, the Annual Energy Outlook for 2017 (AEO 2017) was published by the Energy Information Agency, part of the U.S. Government.[1] The AEO examines U.S. domestic energy production and consumption, with extrapolations[2] into the future. Information from the AEO 2017 provides information and insights relevant to business management. This post focuses on petroleum and natural gas production through hydraulic fracture and directional drilling techniques (“fracking”).

America and Petroleum

The graphic labeled “Energy Consumption” is from the AEO 2017. The brown line indicates that petroleum and related liquids fuels about 35% of America’s energy current energy consumption.[3] Further, it indicates little change in annual petroleum consumption over the next 24 years, given the assumptions used to extrapolate the AEO’s “reference case”.

Over the past several decades, the U.S. has consistently consumed considerably more petroleum than it has produced. The difference has been imported, much of it from the Middle East. Since imports must be paid for, petroleum imports have resulted in a substantial drag on the U.S. economy. Further, securing continuing petroleum supplies from overseas has been a major determinant of U.S. foreign policy.

The graphic labeled “Net Energy Trade” illustrates that, in the years around 2006 – 2008, the U.S. imported amounts of petroleum equivalent to over 25% of its entire annual energy consumption, net of any petroleum exports!

Then something dramatic happened. U.S. domestic production increased rapidly from about 2010, resulting in a major decline in global petroleum prices. Accordingly, retail gasoline prices declined by about half during the last six months of 2014, resulting in boost to the U.S. economy that, in my opinion, triggered in the end of the Great Recession. Think of it this way: when a boatload of crude oil arrived in 2013 at $100+ per barrel, the U.S. shipped a boatload of greenbacks overseas in payment. By 2015, the price of crude was less than $50 per barrel and the number of boatloads imported dropped sharply. So, the U.S. shipped many fewer greenbacks overseas in payment. The rest stayed at home, within the U.S. economy. Since we are talking about millions of barrels every day, the difference really matters.

The Fracking Revolution

Fracking – petroleum and natural gas production by directional drilling plus hydraulic fracturing – is a truly remarkable technological innovation. Look again at the graph labeled “Energy Consumption”. Notice the rapid increase in natural gas consumption from 2010. That too is due to fracking. As a fuel, natural gas is complementary to petroleum. Petroleum fuels primarily transportation. Natural gas fuels mostly stationary consumption, including industrial uses, commercial and residential heating, and especially electric power generation.  

Natural gas is difficult and expensive to transport, other than by pipeline. Fortunately, the U.S. already had a domestic pipeline network in place as the huge increase in natural gas production due to fracking became available. Prior to the advent of “fracking”, global natural gas prices generally followed petroleum (crude oil) prices. The increase in natural gas supply in the U.S. resulted in natural gas prices that are not pegged to petroleum, and that are considerably lower than natural gas prices elsewhere.

Implications, Domestic and International

>> Energy Independence: Due to increased U.S. domestic production of petroleum and natural gas, the AEO 2017 projects that U.S energy exports will exceed imports by 2026, using “reference case” assumptions. That means that, if necessary, U.S. energy production would be sufficient to satisfy America’s energy requirements, without relying on OPEC or anybody else.

>> Industrial Economics: U.S. domestic prices for natural gas are substantially lower than elsewhere in the world. This provides U.S. industry with two competitive advantages in global trade. First, energy costs are low. Second, many important petrochemicals can be produced from natural gas, resulting in lower raw materials cost for many products.

>> Petroleum and Natural Gas Reserves: Fracking is used in geological formations that are different from those where conventional petroleum and natural gas production methods are used. That means energy production becomes possible in geographic areas where it is otherwise infeasible. It also means that the world’s potential reserves of petroleum and natural gas have increased substantially.

>> International Development: Fracking technology can and will be applied in other countries. Correspondingly, many nations that lack conventional petroleum or natural gas production may be able to become producers, thus reducing dependence on foreign sources and gaining a degree of freedom from global energy prices.

>> Cleaner Fuels: Petroleum produced by fracking is generally light and sweet. That means it is easy to refine, with few byproducts such as sulfur or heavy metals. Refining light, sweet crudes is relatively energy efficient. Accordingly, less carbon dioxide is produced when light, sweet crude is produced and consumed. Natural gas is even cleaner.

There is a lot more information worth discussing in the AEO 2017. Look for more posts on other AEO 2017 in the future.

Chuck - Blue SweaterThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

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.

[1] The AEO 2017 is available for free download on the Energy Information Agency’s website, www.eia.gov

[2] I use “extrapolations” rather than “forecasts” to emphasize that the AEO is projecting present and recent past information into the future based on certain assumptions. The “reference case” refers to a “business as usual” set of assumptions that do not anticipate government policy changes or technological innovations, other than those already in place.

[3] Note: U.S. annual primary energy consumption is about 100 quadrillion BTUs.


A Holiday Surprise


Cashing in at the Gasoline Pump

Capture - Crude Oil Prices - 2014Santa came early this year, bringing a welcome boost in personal disposable income and a turbocharger for the U.S. economy. Last June, the world price for crude oil topped out around $114 per barrel, just in time for the usual summer driving season. Then prices began to decline. Then the decline turned into a rout. As you can see from the chart, the world price for crude oil has dropped by just about half since mid year.[i]

Rather reluctantly, gasoline prices at the pump are following crude prices. Where I live, gas is about a dollar a gallon less today than it was last June. For an average Joe who drives 1,000 miles a month at 20 miles per gallon, that is $50 a month, cash money in the pocket. That same average Joe’s paycheck has been stagnant (at best) since the Great Recession began. And nobody explained to Kroger or Safeway that there hasn’t been any inflation. Fifty bucks a month isn’t a fortune, but it will sure help a lot of people. Multiplying that $50 a month by the number of cars on the road results in a figure that even a congressman will notice.

What Happened?

The global supply / demand balance for crude oil reached a tipping point. Prices have been going up – up – up, riding a seller’s market. Now, supply exceeds demand, buyers are in control, and prices are falling like snowflakes in Vail. There are strong reasons for this from both the supply side and the demand side.

>> Fracking – The combination of hydraulic fracturing and horizontal drilling – fracking –has resulted in an enormous increase in crude oil production here in the U.S. As a result, much of the oil that America used to import is now produced at home.

Additionally, fracking has produced a big increase in natural gas production. Low priced natural gas has displaced petroleum products in many heating and steam generation applications, as well as in the production of chemical and plastics feedstocks. To make matters even worse for countries that rely on crude oil exports as a primary driver of their economy, access to fracking technology allows formerly inaccessible crude oil and natural gas deposits to be developed in many parts of the world. Global petroleum reserves and potential for production are going to continue to increase.

>> Negawatts – “Negawatts” is a rather wry term for energy not consumed, thanks to conservation measures. Think higher gas mileage cars and high SEER rated home heating and air conditioning. Arguably, “negawatts” have had a greater effect on America’s crude oil import rate than fracking has. Appreciating Negawatts,[ii] a recent post to this blog, elaborates on “negawatts”.

In any case, crude oil imports have suffered a one – two punch, from the supply side and from the demand side. Just now, global crude oil prices are on the ropes. Of course, as crude prices decrease, high production cost wells will be mothballed and fewer new wells will be drilled. So, prices will recover over the coming months. However, I don’t expect crude oil prices to reach last June’s level any time soon.

For Smaller Manufacturers

About 73% of the petroleum consumed in the U.S. is as fuel for transportation: gasoline, diesel fuel and jet fuel. Much of the remainder is used in industry – think steam generation and process heating. Lower transportation fuel cost means lower shipping costs, in-bound and out-bound. Lower fuel oil cost means lower steam generation or process heating costs – lower, but not as low as natural gas, now and for the foreseeable future. Costs for travel on company business should also improve.

Along with fuel cost savings, there should be indirect benefits. For one, lower energy costs makes U.S. manufacturers more competitive globally. Additionally, since cash that would have gone to crude oil exporters abroad is staying at home, the rate at which money circulates domestically increases, effectively multiplying itself across the economy. Further, as the U.S. balance of trade improves through more export sales and fewer dollars spent on importing crude oil, the U.S. GDP improves. When GDP improves, lots of good things happen.

This current situation regarding petroleum as it affects smaller manufacturers is changing very quickly just now. This post hardly scratches the surface. Look for a considerably more detailed Commentary on petroleum in the coming weeks.

Chuck - Blue Sweater 2Thoughtful comments and experience reports are always appreciated.


…  Chuck Harrington


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.

[i] Crude oil prices are from the U.S. Energy Information Administration. See: http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm

[ii] See Appreciating Negawatts, this blog: http://jerasustainabledevelopment.com/2014/11/22/appreciating-negawatts/