The IEA Gets Excited about America’s Oil Boom
Today the International Energy Agency (IEA) released their 2012 World Energy Outlook. One of the most striking changes from the 2011 edition is the outlook for American oil production, with the IEA upward revising their projection for US oil output in 2020 by 35%. The report describes recent changes in American energy landscape as “profound” and promises their effects will be “felt beyond North America”. In this note, we look at how IEA’s new projections stack up against other leading forecasts and what they mean for American “energy independence”.
America Captures the Saudi Throne (and then gives it back)
In the 2011 World Energy Outlook (WEO), the IEA projected very modest growth in US oil production – from 7.2 million barrels per day (mb/d) in 2009 to 8.3 million mb/d in 2035 (Figure 1). In light of the rapid growth in tight oil production in the Bakken, Eagle Ford and other formations, the IEA upward revised its US supply projections in the 2012 WEO by nearly 3 mb/d in 2020 to 11.1 mb/d – tying 1970-1972 for the highest production in US history. The US accounts for more than 40% of global supply growth between now and 2020 in the IEA’s forecast, adding more oil to the market than all OPEC countries combined.
This puts the IEA at the optimistic end of the spectrum of recent US oil supply forecasts (Figure 2). Projections from consultancy IHS CERA and investment bank Citigroup are even more ambitious – at 12.2 and 14.1 mb/d respectively in 2020 – but the IEA estimates are considerably higher than those from the US Energy Information Administration (EIA), ExxonMobil and BP. This is partly due to timing. The EIA, ExxonMobil and BP outlooks were published early in the year and we expect all three to move closer to the IEA numbers in their 2013 reports.
At 11.1 mb/d, the US overtakes Saudi Arabia to become the world’s largest oil producer – a fact highlighted prominently in the IEA report and quickly picked up on by reporters covering the energy beat. But in the IEA’s estimation, the coup is only temporary (Figure 3). US production peaks in 2020 and then gradually declines as the most promising tight oil plays are exhausted. By 2035, US output is down to 9.2 mb/d, only 600,000 barrels per day above current levels.
Over the long-term, the IEA sees the US accounting for less than 9% of global supply growth. Between 2011 and 2035, Canada adds twice as much as the US to global markets (2.8 mb/d), and Brazil adds three times as much (3.5 mb/d). But most of the heavy lifting is done by OPEC. The IEA expects Iraq will account for more than half of OPEC growth with Baghdad adding 5.6 mb/d of output between 2011 and 2035. So while overall OPEC market share declines slightly between now and 2020, from 42 .2% to 41.9%, it grows to 48% by 2035.
Efficiency Picks up where Supply Leaves Off
The IEA made some significant demand-side revisions as well. Thanks to new fuel economy standards and higher oil prices, projected US oil demand in 2035 is 2 mb/d lower in the 2012 WEO than in the 2011 edition (Figure 4). At 12.6 mb/d, American oil demand in 2035 would be lower than at any time since 1967. The report estimates that improved vehicle efficiency will save American drivers 7.5 billion barrels of oil between 2010 and 2035. At the IEA’s projected oil price, that’s roughly $37 billion per year. And the decline in US demand nearly offsets the increase in Chinese demand in the IEA’s forecast, which helps keep global oil prices in check.
Attacking the Problem from Both Sides
Combine improved efficiency with increased US oil and gas supply, and the IEA expects America’s energy trade deficit to decline to 3.8% of total energy consumption by 2035. That’s down from 30% in 2005 and the lowest level the US has seen since 1957 (Figure 5). Domestic production growth accounts for most of the decline between now and 2020, but efficiency does the heavy lifting after that.
This highlights the importance of tackling America’s energy challenges from both the demand and supply side of the ledger. In the late 1970s, rising oil prices prompted both an increase in US oil production and a decrease in oil demand (thanks in part to new fuel economy standards). As America’s call on global oil markets declined, so did global oil prices and the commercial and political pressure to improve energy efficiency. That left the US economy vulnerable when prices started to rise again at the beginning of the last decade.
Continuing to drive energy efficiency improvements through innovation, education, codes and standards will help ensure the US captures the benefits the IEA report promises, even if prices fall, while reducing the vulnerability of the US economy to oil market disruptions in the future. As the IEA notes, “reducing its oil imports will not insulate the United States from developments in international markets”. But reducing the oil-intensity of the economy by making vehicles, homes and businesses more energy efficient certainly helps.