Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

Guest Post: An Age of Abundance – Can New Fuel Supplies Drive Prices Down?

fuel pump

 

This week, David is speaking at our annual TMC Client Forum in Chicago.  Given the relevance of this topic to many, David has provided some information from his session for this guest post contribution.

It is probably a good thing that the economic law of supply and demand is not subject to the whims of the legislative, executive or judicial branches.  At the same time, that iron-clad law does tend to limit the ability of policy-makers to provide relief to fuel consumers.

In general, the U.S. energy picture has perhaps never looked better.  Technological advances have brightened significantly the domestic supply outlook for oil, both from shale oil reserves and from deep water offshore resources. Higher oil prices and better technologies have made it economically feasible to develop the liquid hydrocarbons trapped in low-permeability/low-porosity formations.  Meanwhile, improvements in drilling technology and the opening of additional areas in the Gulf of Mexico and other areas of the U.S. Outer Continental Shelf (OCS) are expected to increase offshore oil production in the coming years. 

These changes have already begun to reverse the decline in domestic crude oil production that began in 1986.   The Energy Information Administration (EIA) estimates that 2012 crude oil production was 6.41 million barrels per day — the highest level of production since 1997.  By 2020, EIA projects crude oil production will be at the highest level in some 30 years — 7.47 million barrels per day.

fuel graph

 

And the US demand side looks pretty good too, with EIA projecting a peak back in 2005 and demand below 20 million barrels of day – and declining – through 2035.

Yet diesel prices are still forecast to rise over time.

fuel chart

Persistently high prices are due simply to the global demand-side of the equation.  In China alone, oil consumption grew almost five-fold between 1991 and 2012, and China quickly went from being a net oil exporter to the world’s second largest net importer.  10% annual growth in consumption between 2009-10 eased somewhat to 4% growth in 2011, but continued economic growth in China and other rapidly developing countries is forecast to keep supplies tight and supplies relatively high.

fuel chart

In the US, efforts to reduce our dependence on foreign oil have been based on energy security concerns and predated the era of high prices we’ve been in for the past decade.  Because nearly 70% of our petroleum consumption is within the transportation sector, and because petroleum-based liquid fuels account for 97 percent of total energy consumption in that sector, fuel diversification and increased efficiency have been the primary policy tools available to reduce demand and, theoretically, lower prices. Improved vehicle fuel efficiency may indeed complement new supplies of petroleum and increased use of alternative fuels to enhance America’s energy security, improve environmental quality, and reduce the U.S. economy’s exposure to world oil price volatility.

But whether it also results in lower prices for US consumers is largely dependent on actions taken by our global trading partners.

David Conover is Senior Vice President and Director, Energy and Environment Practice at the global public affairs and government relations firm Dutko Grayling.  He previously served as Principal Deputy Assistant Secretary at the US Department of Energy’s Policy and International Affairs Office.

- Senior Vice President, Dutko Grayling
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