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Long-term Trends in U.S. Crude Petroleum Production and Net Trade

AgMRC Renewable Energy & Climate Change Newsletter
July/August 2014

Dr. Robert Wisner
University Professor Emeritus

Iowa State University
and Biofuels Economist
rwwisner@iastate.edu

With greatly increased political turmoil in the Middle East, U.S. domestic energy supplies and needs are increasingly important for consumers and the biofuels industry.  For decades, a stated objective of U.S. energy policy has been to provide domestic energy security.   With the growth in U.S. biofuels production in the last decade and a very recent sharp increase in domestic petroleum production, the U.S. has become significantly less dependent on petroleum imports than a decade ago.   Even so, pricing in petroleum-based energy markets is strongly influenced by developments in the Organization of Petroleum Exporting Countries (OPEC).  The reason for that is that petroleum is a global commodity and is affected by global supply and demand conditions.   If U.S. prices are too low, foreign buyers would quickly increase imports of U.S. petroleum and petroleum products, thus creating a potential U.S. domestic shortage.  If U.S. prices are too high, incentives for domestic crude oil and biofuels production will be increased, thus tending to increase longer-term supplies.   But in the short-term, refiners would have an incentive to increase imports of crude oil.  In this article, we review long-term trends in U.S. crude petroleum production, reported reserves, and foreign trade.   All of the data presented in this report are from the U.S. Energy Information Administration (EIA).

U.S. Proven Crude Oil Reserves Increase Sharply in the Last Six Years

Figure 1 shows the history of known U.S. crude oil reserves since the very beginning of the Automobile era.   There have been numerous times when the prevailing expectation was that the U.S. would soon exhaust its reserves, but so far that hasn’t happened.  One of those periods was in the 1930s.  Another was in the 1979-2005 period.  Since that time, U.S. crude oil reserves have increased sharply.  Data in the chart are through the year 2012. Reserves likely have increased some in the following two years.  Concern over potential depletion of crude oil reserves was one of several factors leading to biofuels research in the 1930s (1).  Oil export embargoes by OPEC in the 1970s reinforced concerns leading to renewal of that research in the 1980s. 

Figure 1.

The size of U.S. crude oil reserves has varied over time with changes in technology available to economically tap into the reserves and the price of crude oil since it affects feasibility of accessing reserves.  A technique known as “fracking” has been used extensively in the last few years for production of crude oil from shale formations and “tight” oil and gas reserves.  Wikipedia (2) indicates fracking is fracturing deep rock layers through use of pressurized liquids.  It indicates the liquid usually is water mixed with sand and chemicals, and that the small fractures created are usually less than 1.0 millimeter (0.04 inch) wide.  Wikipedia also indicates the technique was first used experimentally in 1947 and came into commercial use in 1949.   Before that time, explosives were used for fracturing the rock formations.   It reports that globally, the technique has been used on 2.5 million jobs involving oil and gas wells. (3)  

Hydraulic fracking has been an important technology in accessing “tight” petroleum and gas deposits in the U.S.  Use of this technology has been a factor in increasing 2012 U.S. petroleum reserves to the highest level in over three and one-half decades and in the sharp increases in U.S. crude oil production in the past eight years.   However, fracking is a controversial technology despite its extensive use.  Environmental groups express concern about impacts on quality and availability of ground water, chemical contamination of ground water, impacts on seismic activity and other aspects.  

The map below shows where production in the major “tight” U.S. oil and gas fields is occurring.   These are not the only areas where U.S. crude oil production has recently increased but they are the most important ones.  These six regions accounted for 95% of the U.S. domestic crude oil production growth and all of the natural gas production growth in the past three years.(4)

U.S. Crude Oil Production History

Figure 3 shows monthly U.S. crude oil production since 1920.  Production increased almost continually from the mid-1930s through 1970 and was able to supply a growing market for motor fuels, chemicals, plastics, asphalt and other products made from crude oil.  From 1970 through the next few years, U.S. production declined.  Then, with a lagged response to the sharp increase in petroleum prices in the 1970s, production shifted to a modest uptrend near the end of that decade that continued through 1986.   From 1987until the mid-2000s, production declined almost steadily.  However, the trend shifted dramatically after the mid-2000s, as shown in the chart.  Production has increased by 38% since March of 2000 and 113% since September 2008.  Despite the increase, March 2014 production was still 18% below the peak reached in October 1970. 

EIA projects that the increase in production will continue at least until 2016 or 2017.  Production next year is expected to be about 9.2 million barrels per day.  That would be a monthly rate of approximately 276 million barrels.   The last time U.S. production was that high or higher was in March of 1986.   EIA tentative projections show a possible leveling off of production in 2017-20 at around 288 million gallons per month, although it indicates there is much uncertainty about the projection.  Production at that level would be slightly below the peak levels of the early 1970s. (5)  Political turmoil in the Middle East and its resulting impact on crude petroleum prices could be one of several factors influencing the trend in U.S. production over the next several years.  

The sharp increase in production in areas outside the major petroleum refining region and lack of pipelines to transport the crude oil to refiners have created stress on rail transport facilities.  That has been especially noticeable in North Dakota and has complicated the availability of rail equipment to move grain and ethanol from the Midwest in other parts of the country.

In contrast to sharply increased production on private lands, the number of public land leases for oil and gas production has declined for many years, as shown in Figure 4.  These leases in 2013 were  concentrated in five states which account for 77% of the total: Colorado, New Mexico, Utah, Montana, and Wyoming.  Wyoming accounted for 34% of the total. New leases in 2013 were concentrated in these same states, with 17% in Montana and 30% in Wyoming.  New wells started on federal lands reached a peak in fiscal 2007 and by 2013 had declined by 55% from that level.

Trends in U.S. Imports and Exports of Crude Oil

For many decades, the U.S. has been a net importer of crude oil, as shown in Figure 5.  Net imports reached a peak at 80% of domestic production in 1977 and declined sharply to 36% in 1985.   The mid-1980s were followed by a rapid increase in imports that peaked in 2004.  With the downward trend in crude oil production, net imports as a percent of production peaked in 2007 at 199% of domestic production.  The trend in net imports since that time has been sharply downward in response to a combination of increasing biofuel production and the sharp increase in domestic crude oil production in the last few years.   There are many uncertainties that will affect future trends in these variables.  Domestic U.S. ethanol use is very close to at least a temporary saturation point, although that could change with government policies and rising gasoline prices which might arise if serious disruptions in Middle East oil shipments should occur.  So far, the trend in domestic crude oil production is intact and appears likely to continue with high crude oil prices.  Automobile fleet average fuel mileage standards are set to increase sharply in the next several years and are expected to reduce domestic petroleum use.  This combination could cause the downward trend in net U.S. crude oil imports to continue.   Even so, U.S. oil imports are large.

Concluding Comments

The U.S. and global economies are extremely dependent on crude oil.   U.S. energy policies in the past decade have focused increasingly on energy independence and security, as implied by the title of the 2007 energy legislation, the Energy Independence and Security Act (EISA).  The U.S. has made considerable progress in reducing its crude oil imports since the passage of EISA.   Even so, it remains heavily dependent on crude oil imports.  Any major disrutpion of Middle East oil exports or dramatically increased prices resulting from political turmoil in that region would quickly affect U.S. prices for biofuels and petroleum-based motor fuels, heating oil, and a wide range of products made from petroleum.

References

1  R. N. Wisner, “The economics of Gasahol” in Economic Analysis and Agricultural Policy, Edited by Richard H. Day, Iowa State University Press, 1982, pp. 228-237.

2  Wikipedia internet encyclopedia: http://en.wikipedia.org/wiki/Hydraulic_fracturing  

3  Ibid.

4  U.S. Energy Information Administration, Drilling Productivity Report, June 9, 2014 

5  EIA, U.S. Crude Oil Production Forecast-Analysis of Crude Types, May 29, 2014
 

 

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