Welcome to Kiplinger’s Energy Alerts — a digital heads-up on coming trends and breaking developments in the energy industry. The alerts are free through June 9. In this issue, we zero in on what’s shaping up as a momentous year for the U.S. oil market: Oil prices are down, U.S. crude production is up, and many Americans are ditching fuel sipping compact cars for pickup trucks and SUVs like it’s 1999, boosting gasoline demand. And we’re only in April. Here’s how I see the remainder of the year for U.S. and global oil markets plus my read of oil supply-and-demand trends over the longer term.
Outlook for the Rest of 2015
Oil production in the U.S. figures to remain robust, despite a small dip this spring or summer as oil firms drill fewer new wells in response to the big drop in crude prices. At more than 9 million barrels per day, crude output is nearing its all-time high, set in 1970. Factor in the 5 million barrels of biofuels, propane, butane and other liquid hydrocarbons the U.S. churns out each day, and daily petroleum output jumps to almost 15 million barrels — about three-quarters of total demand.
The U.S. will continue to be the number three producer of crude, after Russia and Saudi Arabia.
Given the surge in production, it’s no wonder U.S. dependence on imported oil and refined fuels is plummeting. Imports from the Organization of Petroleum Exporting Countries (OPEC), the international oil producers cartel, are down more than half since 2008. Nigeria, long a key supplier to the U.S. market, now sends virtually no crude at all to American shores.
Odds are that net imports of foreign petroleum — meaning total imports minus oil or refined products that the U.S. exports — will approach zero by the end of this decade. Plenty of oil and fuel will still flow in and out of the U.S. market, but dependence on foreign suppliers to make up the shortfall in domestic production will fade away.
Meanwhile, exports of U.S.-refined fuel will keep surging as American refiners take advantage of abundant crude and excess refining capacity to ship gasoline, diesel, propane and other products abroad. Bill Day, spokesman for Texas-based refining giant Valero, says the firm recently exported about 10% of its gasoline production and roughly a quarter of its diesel output. Most of those sales go to Mexico and other Latin American buyers, an “increasingly important” market, he says.
Strong foreign demand for refined fuel is especially good for U.S. refiners because of the long-standing ban on exporting most American crude oil. Sales of refined products face no such limit, so American refineries can buy U.S. crude at a discount to foreign benchmarks but still sell their refined products at regular market rates. Plus, as Valero’s Day notes, U.S. refineries use cheap American natural gas to power their plants — a big cost advantage compared with foreign rivals.
But note that exports of U.S. crude oil are quietly on the rise. Sales to Canada are generally exempt from the export ban, and Uncle Sam has also OK’d exports of condensate, a very light form of crude recently deemed eligible for export if it undergoes some simple chemical processing. Exports of condensate hit 80,000 barrels per day in January, up sharply from last year. At least one exporter, Enterprise Products Partners, aims to significantly ramp up its condensate exports this year. The company is seeing growing demand from Asian buyers.
Even as other countries buy more U.S.-made fuels, Americans are filling gasoline tanks more often, too. After trending down in the wake of the Great Recession, total U.S. petroleum demand is on the rise again. An economy generating more jobs spells more drivers who need to fuel up, and the recent tumble in gasoline prices is encouraging folks to drive more for pleasure as well. This summer figures to be the busiest travel season since before the recession, and gasoline sales could potentially exceed the peak set in August 2007, when drivers purchased more than 400 million gallons every day.
Looking Beyond 2015
Don’t expect this year’s big jump in fuel consumption to become the new normal. What we’re currently seeing is an unusual combination of faster economic growth and relatively cheap gasoline, which is spurring demand.
In the longer term, oil consumption is likely to resume the gradual decline that began in 2007, when total U.S. oil usage peaked at about 22 million barrels per day. Two big factors explain why.
First, Uncle Sam is determined to see the country burn less fuel over time. The government’s latest fuel economy rules require manufacturers to ramp up the mileage of their new vehicles, with a target of 54.5 miles per gallon for 2025 models. John O’Dell, green cars editor for Edmunds.com, says that the 54.5 mpg figure reflects a complicated formula the government uses for figuring fleetwide fuel economy and that future vehicles will have to average about 40 mpg in real-world mileage tests to meet the 2025 goal. Still, that’s nearly double the average fuel economy of today’s new cars, he says.
So look for automakers to invest in a slew of fuel saving technologies: Thriftier gas engines; hybrid cars that can run on battery power for short distances; fuel cells that combine hydrogen and oxygen to generate electricity; and electric cars that plug into the electric grid. Edmunds’s O’Dell reckons that all these approaches are needed to keep up with ever-tightening mileage regulations.
Moreover, even as automakers race to save gas, younger Americans are turning away from driving altogether. The American Public Transportation Association reports that 2014 saw the highest ridership on subways, buses and other public transportation in 58 years. Transit officials in cities attracting millennial residents, such as Austin, Texas, and Denver, are seeing especially heavy growth in transit usage. Automakers hope to eventually win over these carless young consumers with tech-heavy small cars that fit better into urban landscapes. But they face an uphill battle to alter what looks like a generational shift away from car ownership.