The surge in US shale oil has offset declines elsewhere, stabilized world oil supply, prevented gas prices from rising

By Carpe Diem

A frequent question I’ve heard recently goes something like this: With the huge increase in the supply of domestically produced crude oil in recent years – US output is now at a 27-year high and heading for an all-time record high next year – why haven’t gas prices come down? Gas prices today, at a national average of $3.62 per gallon, are more than double the $1.61 per gallon price in early 2009. During that time, domestic crude oil output has increased by 68.5% from 5 million to almost 8.5 million barrels per day (bpd). I provided several answers to the “pain at the pump” question in a recent CD post, and will expand on that explanation here with two revealing charts.

1. The chart below shows monthly US and world crude oil production from January 1994 to December 2013 based on EIA data here for international crude oil production. Despite the 30.5%, and nearly 2 million bpd, increase in US oil output in just the last two years (2012 and 2013), the world crude oil supply has remained flat at about 76 million bpd since December 2011. At the same time, the world economy has continued to grow, with world real GDP increasing 3.9% in 2011 and 3.2% in 2012, according to the IMF, following a 5.2% growth rate in 2010.
2.  The second chart shows monthly world oil production minus US production over the same 1994-2013 time period vs. the same US oil supply. Without US oil output, the world supply of non-US crude oil was on a gradual downward trend between 2011 and 2013. Importantly, If US oil output hadn’t been surging in 2011, 2012 and 2013, the global oil supply would have been declining slightly in those years. Between the January 2011 peak and September 2013, non-US world oil output fell from by more than 2 million bpd (and by 2%) from a record high 70.2 million bpd to 68 million bpd. Oil production outside the US recovered slightly towards the end of last year to 68.8 million bpd, but that’s the same amount of non-US oil produced back in late 2004, more than nine years earlier. As the WSJ reports today, crude oil output since 2005 has been falling outside the US in countries like Mexico (-25%), Iran (-23%), Algeria (-12%) and Libya (-44%).

 

Bottom Line: As can be seen in the top chart, the increases in US shale oil in recent years have offset the output declines elsewhere and thereby prevented the world supply from falling. Thanks to America’s shale revolution, the surging US oil output has helped stabilize world oil supply at about 76 million bpd during all of 2012 and 2013 which has helped stabilize prices at about $100 per barrel. If we had instead experienced a declining world oil supply over the last few years (as seen in the second chart above) interacting with the strong oil demand from the economic growth taking place globally, we would likely be seeing much higher oil prices today and much higher prices at the pump. Even if the rising domestic oil supply hasn’t brought gas prices down, American consumers should nonetheless be thankful for the strong likelihood that without the Great American Energy Boom, they would be paying much higher gas prices today.

 

Related: Fuel Fix is reporting today that:

Geopolitical turbulence in the Middle East would have created a spike in global oil prices if not for the rise of light-crude in the United States and oil sands in Canada, ConocoPhillips CEO Ryan Lance said Tuesday.

As international conflicts have mounted in Libya, Syria and Iran over the past two years, an increase of 1 million barrels per day from U.S. shale and tight-oil production have kept global markets in check, Lance said in a discussion with reporters after the company’s annual shareholder meeting in Houston on Tuesday.