Is U.S. Energy Dominance Coming To An End?

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Oil pumpjacks in a desert landscape
CREDIT: SHUTTERSTOCK PHOTO

America’s era of “energy dominance” was brief.

The slogan was always silly. Leaving aside the extensive environmental fallout, the notion that a debt-fueled drilling boom allowed the U.S. to “dominate” energy markets in some way never really made sense. And despite a substantial increase in production over the past decade, activity is and always was connected with the global market – aggressive drilling never insulated the American economy from these global forces, at least not in the way that industry-friendly politicians seemed to think.

But the metric that proponents of the “dominance” mantra often cited was export levels. Indeed, U.S. petroleum import dependence decreased over the past decade and volumes of exports rose. Notably, the U.S. became a net exporter of petroleum products on a monthly basis last September for the first time since 1973, punctuating claims to energy dominance.

US monthly total petroleum trade

But the American shale bonanza was built on a decade of debt, aided by near-zero interest rates and a tidal wave of cash (several waves, actually). The drilling boom was already expected to slow dramatically this year, even before the pandemic.

Now, it is definitively over, at least for a while, and with it goes America’s claim to energy dominance. In its latest Short Term Energy Outlook, the U.S. Energy Information Administration (EIA) predicted that the U.S. “will return to being a net importer of crude oil and petroleum products in the third quarter of 2020 and remain a net importer in most months through the end of the forecast period,” which runs through 2021.

It was only a few months ago that the U.S. became a net exporter. America’s energy dominance didn’t last very long.

The EIA says U.S. oil production could fall by 0.5 mb/d this year, and decline by another 0.7 mb/d in 2021. That’s an annual average figure, masking a 1.75 mb/d drop between March and October. The

Department of Energy cited this data as a justification for why the U.S. doesn’t need to mandate cuts in order to “participate” in the potential OPEC+ agreement. “With regards to media reports that OPEC+ will require the United States to make cuts in order to come to an agreement: The EIA report today demonstrates that there are already projected cuts of 2 (million bpd), without any intervention from the federal government,” the U.S. Energy Department said.

Even that might be on the optimistic end. U.S. E&Ps may cut spending by $25 billion between 2019 and 2020, according to a new estimate from IHS Markit. That could translate into production declines of 2.9 mb/d by the end of the year compared to the first quarter. “The Big Cut is here. The U.S. government can’t order cutbacks like other countries. But economics and the market are mandating dramatic budget cuts that will bring down U.S. production this year,” Daniel Yergin, vice chairman, IHS Markit, said in a statement.

The U.S. oil industry has scrapped 102 oil rigs in just the past two weeks, including 54 from the Permian. Even ExxonMobil, which hopes to consolidate its position in the Permian, is retrenching, slashing spending by 30 percent.

Rystad Energy forecasts a decline in the rig count by 65 percent from mid-March levels. “The speed of this decline exceeds the initial post-oil-price-crash expectations. This is for sure a much faster industry reaction than during the previous US land rig down cycles, and we will likely see continuous downward adjustments of similar magnitude throughout the next couple of months,” says Rystad Energy’s Head of Shale Research Artem Abramov.

Oil prices could yet rebound in the months ahead, not least because so much supply is uneconomical. OPEC+ may or may not come to a global arrangement with the U.S. and other non-OPEC producers later this week, and the U.S. could claim to “contribute” to production declines, but either way supply is heading down.

If WTI were to average $30 per barrel, roughly 40 percent of oil and gas companies would be insolvent in the next 12 months, according to a survey from the Kansas City Fed. Standard Chartered estimates a decline in U.S. oil production by as much as 4 mb/d by the end of 2021 if WTI were to average $30.

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