Policy vs. oil supply

May 12, 2014
A rough collision of oil supply and energy policy looms by implication in the US Energy Information Administration's Annual Energy Outlook.

A rough collision of oil supply and energy policy looms by implication in the US Energy Information Administration's Annual Energy Outlook. The AEO projects the tantalizing possibility of a US dependent on no other country, not even Canada, for any of the crude or oil products it needs beginning in the latter half of the 2030s. That would be historic. The US has been a net oil importer since the 1940s. If current tendencies of energy policy remain in place, that won't change.

Already, most long-term forecasts see net-exporter status for North America in the 2030s. Those views assume continued growth in production from the Canadian oil sands, with most of the incremental supply flowing to the US to supplement expanding output from tight formations and deep water. The US then would import oil only from Canada, and, if Mexico doesn't regress, North America becomes a net oil exporter. The scenario is plausible and rich with benefits for all three countries.

Continental exports

By itself, the US is much less likely than the continent is to become a net exporter of crude and oil products, although it's now a leading exporter in the latter category. The EIA showed how difficult the achievement would be in its supply assumptions for the upper scenario of the AEO, labeled "High Oil and Gas Resource." For oil production sufficient to eliminate net imports, the agency assumed strongly increased production from low-permeability reservoirs as well as kerogen output of 135,000 b/d by 2020 from Lower 48 oil shale.

If the only hurdles were technological and economic, high-case production might be possible. In the AEO high case, production of tight oil peaks at 8.5 million b/d in 2035, instead of 4.78 million b/d in 2021 under more-likely reference-case assumptions. That much production would require technical advances enabling ultimate recovery from tight oil and gas wells to increase by 50%. Large-scale development of oil shale is even more daunting. Today, the US produces no kerogen commercially from its huge resources in the Greater Green River, Uinta, and Piceance basins.

Still, technology has delivered surprise after supply surprise in recent years as production from low-quality reservoirs becomes economic. At this stage, categorical doubt about further improvement seems unreasonable.

Political doubt is another matter. Policy in the US tilts toward nonfossil energy sources and against hydrocarbons. The administration of President Barack Obama consistently threatens to raise taxes on oil, gas, and coal. It favors production and use of otherwise uncompetitive energy forms with subsidies and sales mandates. And it hampers the output of fossil energy with a barrage of regulations.

One product of this orientation is slow leasing of federal land for oil and gas development. The Obama administration has made much less acreage available per year than its recent predecessors. Onshore operators with federal leases encounter long permitting delays, onerous surface-use stipulations, and sometimes endless legal challenges. Much of the AEO high-case gain in production from tight formations would come from federal land. Almost all the kerogen production would.

Environmental extremists would resist the necessary increase in leasing and permitting. And development of oil shale, promising to further prolong domination by hydrocarbons of energy markets, would give pressure groups a new dragon to slay.

Foresworn benefits

If policy-making by post-Obama administrations doesn't seek a new, more-balanced course, obstructionism will prevail. As proven by failure after 6 years to approve the Keystone XL border crossing, US policy is essentially set by environmentalists opposed to oil and gas and committed to limiting supply from emerging hydrocarbon resources. The administration needs the political support of environmentalists, especially wealthy ones. So energy policy takes scant account of the economic and security advantages of resource development, especially when the resource contains carbon.

Self-sufficiency in oil and gas would amplify the benefits now consistently and expensively foresworn. Yet, under any circumstances, achieving self-sufficiency remains technically and economically challenging. Without change to the regulatory climate, it's politically doubtful.