U.S. Oil Production

[dan_s]

The U.S. currently consumes about 19 million bbls per day of liquid fuels. About 14 million bbls per day are crude oil. The rest is NGL based and biofuels. We don't have enough farmland for biofuels to ever be a significant portion of our fuel supply. Plus, it take more energy to make biofuels than they produce.

Many Americans are under the impression that crude oil production from the shale plays will increase forever and make the U.S. energy independent by 2020. It is not going to happen.

The U.S. Energy Information Administration (EIA) admitted it in a recent report. The EIA is now predicting that the U.S. daily oil output will peak in 2016 at 9.5 million bbls per day. I think it may go a bit higher than that, maybe 10.5 million bbls per day by 2020, but we will never be totally "energy independent". The only way that happens is if we use a heck of a lot more natural gas for transportation fuels.

In their report, the EIA sites the fact that production from shale wells declines at 10 to 15 times faster than conventional wells. It is simple math, at some point we will not be able to drill enough new wells to make up for the declining old wells.

Brent crude averaged $109/bbl in 2013. EIA predicts Brent will drift down over the next two years to average $102/bbl in 2015. [They may have talked to Saudi Arabia who told them they will aggressively defend the price as it approaches $100.] EIA says WTI should average about $12/bbl less than Brent over the next two years. Then the gap should tighten.

WTI trades at a discount to Brent because we have a glut of the stuff in the U.S. WTI and Brent are very close in quality. Our refineries cannot take much more WTI since a lot of them were built to handle heavier crudes. Don't be confused by the headlines about API wanting Washington to permit the U.S. to export oil. We will never be a net crude oil exporter.

Oil prices are impacted by many factors and they can be volatile over short periods, however I think using $90/bbl for WTI in my forecast models for 2014 and 2015 is a reasonable price.