U.S. Crude Oil Production, Use, and Import Trends
AgMRC Renewable Energy Newsletter
Professor of Economics and Energy Economist
Ag Marketing Resources Center
Iowa State University
While the U.S. public is concerned about rising food prices, the sharp escalation in gasoline prices in the past two years probably is an even bigger concern for many people. According to the U.S. Department of Energy, crude oil provides over 40% of the energy needed for the U.S. economy and the vast majority of our vehicle energy needs. Rising energy prices have large impacts on the U.S. and world economy through increased costs of transportation, food processing, petrochemical product costs, heating and cooling expenses, farm inputs that raise the cost of producing crops, and in many other ways. The rapid expansion of the ethanol industry in the last three years has been driven to a large extent by the almost continual strong upward trend in crude oil and gasoline prices. And in the first six months of 2008, the trend toward higher crude oil prices accelerated, as Figure 1 indicates.
In the spring of 2007, crude oil prices were in the low $60 per barrel range. At this writing, they have been as high as $148 per barrel. From the end of December of 2007 to mid-June 2008, crude oil prices rose by 45%. That is an annual rate of increase of about 106 percent.
The very high crude oil prices affect the U.S. economy in several negative ways. For businesses that cannot pass higher costs on to others and for consumers, they act as a very large tax, thus slowing economic activity. From a trade perspective, the sharply increased cost of U.S. oil imports worsens the nation’s balance of trade, thus sending a large increase in the flow of dollars out of the country and weakening the value of the dollar. Many of those dollars go to countries that are politically unfavorable.
Figure 2 shows the volume of U.S. crude oil imports since the early 1900s, along with U.S. crude oil production and estimated domestic use. The U.S. Energy Department does not provide total use data, so we have estimated it from production, imports, and ending stocks changes. US crude oil production peaked in the early 1970s, then after a decade of decline, rose to a secondary peak in 1985. Since 1985, production has been in a sharp downtrend, in part due to environmental restrictions on oil drilling that were implemented in the 1980s. The 2007 domestic crude oil production was 44% below that of 1985. After a sharp decline in the 1980s in response to high oil prices and a shift of the auto industry to smaller more fuel-efficient vehicles, domestic use trended almost steadily upward until the last three years. As you look at the volume of imports, keep in mind that the dollar volume has climbed much more rapidly because of the sharp rise in prices shown in Figure 1. This sharply rising cost of imports has had a very negative impact on the U.S. balance of trade and the value of the dollar.
Figure 3 shows the percentage of U.S. demand that is filled by imports. U.S. crude oil accounted for 44% of domestic use in 1977, before dropping to 25% of use in 1985. Since, 1986, imports as a percent of domestic use have been in an almost steady uptrend. Last year, they accounted for 66% of total domestic crude oil use. If the trend were to continue indefinitely at the rate of the last two decades, the U.S. 2028 would be totally dependent on imported oil for its supplies. However, it is unlikely that the trend will continue indefinitely into the future. Recent crude oil prices have been at economically unsustainable levels and are triggering adjustments on both the supply and demand for energy.
Figure 4 shows the sources of U.S. oil imports in 2007. While Mexico and Canada are our largest suppliers of crude oil imports, a large part of our supply comes from the Middle East and other politically unstable areas.
Factors Behind the Rising Oil Prices
There are various views on what is driving the very strong increase in fuel prices. Important factors include weakness of the U.S. dollar, although the 2.6% decline in the trade-weighted value of the dollar from late December 2007 to mid-June would explain only a very small part of the spring 2008 increase. Rapid growth in demand for crude oil in China and India also is frequently cited and is part of the picture. China is credited with accounting for 34% of the growth in world demand for crude oil in the past three years, in contrast to 7% from the U.S. Supply uncertainty in parts of Latin America, Africa, and the Middle East also has contributed some to the uptrend in prices. Other sources point to declining production in the U.K., Mexico, and Norway because of aging oilfields, and in parts of Russia because of inadequate investment in the industry. Russia is the world’s largest oil producer. There has been discussion of the end of “big oil” sometime in the foreseeable future. In other words, there has been talk that world oil production is approaching its maximum possible level and will soon begin to decline. However, recent record-high crude oil prices have stimulated increased investments in oil exploration, drilling and other infrastructure outside the U.S. Similar investments in the U.S. have been constrained by very tight environmental regulations.
Sources of Expanding Crude Oil Production
Areas of expansion in crude oil production that are underway currently and/or are anticipated in the next few years include Brazil, Canada, various former Soviet Republics, and Sudan. Trade sources indicate world production is beginning to increase by about 800,000 barrels per day. The very high oil prices have made it feasible to drill to much greater depths than in the past. They have also encouraged the use of new technology to develop oil sources that in past years were not feasible to tap into.
Recent explorations off the coast of Brazil have identified what is described as a very large oil field there. A similar discovery has been reported at great depth in the Gulf of Mexico off the coast of Florida. While U.S. environmental regulations may limit the U.S. oil industry’s ability to develop this discovery, trade sources indicate China and Cuba are planning to cooperate in its development. The oil industry also is aggressively working in the tar sands of western Canada and has begun production of crude oil from that source. U.S. government information indicates that more than one million barrels of oil are produced from the Canadian tar sands each day, and that production is expanding rapidly. Tar sands also exist in Utah and feasibility of commercial development of oil in that area is being explored.