Making Sense of the US Oil Story

We frequently see stories telling us how well the United States is doing at oil extraction. The fact that there are stories in the press about the US wanting to export crude oil adds to the hype. How much of these stories are really true? If we believe the stories, the US is now the largest producer of oil liquids in the world. In fact, it has been the largest producer since the fourth quarter of 2012.

Figure 1. US Total Liquids  production, including crude and condensate, natural gas plant liquids, "other liquids," and refinery expansion.

Figure 1. US Total Liquids production, including crude and condensate, natural gas plant liquids, “other liquids,” and refinery expansion.

Oil “Extenders”

One of the issues is that a few years ago, the US created a new oil-related grouping, combining valuable products with much less valuable (lower energy content, less dense) products. Using this new grouping, the US was able to show much improved growth in total “oil” supply. The US EIA now calls the grouping “Total Oil Supply.” I refer to it as “Total Liquids,” a name I find more descriptive. Besides “crude and condensate,” the mixture includes “other liquids,” “natural gas plant liquids,” and “refinery expansion.”

“Crude and condensate” is the original grouping. Often, it is just referred to as “crude oil.”

“Other liquids” is primarily ethanol from corn. If we produced coal-to-liquids, it would be in this category as well.

Natural gas plant liquids (NGPL) are the liquids that condense out of natural gas when they are chilled and compressed in the natural gas processing plant.

Refinery expansion occurs when a refinery breaks long chain hydrocarbons into shorter ones. The resulting products take up more volume, but don’t really have more energy content. In some ways, the process is like making whipped cream out of whipping cream–more volume, but not really more product. The new products tend to be more valuable–say, diesel and lubricating oil made from something close to asphalt.

The process of breaking (cracking) long hydrocarbon chains is a valuable service to those producing heavy oils, because it makes valuable products from crude that otherwise would not have been useful for most purposes. The cracking process uses natural gas. Because natural gas in the US is inexpensive relative to its price in most other countries, the US can perform this process more cheaply than other countries. Because of this, it makes financial sense for the US to import heavy crude oil and process it in this way, whether or not US citizens can afford to buy the finished products. (Cracking is not useful on very light oil, such as Bakken oil, since it has primarily short chains to begin with.) If US citizens can’t afford the finished products, they are exported to others.

Whether or not the US should be credited with this expansion of volume is somewhat “iffy,” since the process doesn’t add energy content. Quite a bit of the oil processed in this way uses imported oil, such as oil from the Canadian oil sands.

If we look at the base figure reported by the US Energy Administration, that is, “Crude and Condensate”(Figure 2), the US does not come out as well in original comparison (Figure 1).

Crude and Condensate Prodution US Saudi Russia

The United States makes much greater use of extenders than do Russia and Saudi Arabia. If we calculate the ratio of extenders to the base (crude and condensate), the ratios are as follows:

Figure 3. Extenders as a percentage of crude oil production.

Figure 3. Extenders as a percentage of crude oil production, based on EIA data.

Both Russia and Saudi Arabia have much lower ratios of extenders. For both of these countries, the extenders are Natural Gas Plant Liquids.

Natural Gas Plant Liquids (NGPL), have varied in price. For a while, the price was up with the price of crude, but as supply increased, the US price dropped during 2011 (Figure 4).

Figure 4. Price Comparison per Million Btu for Oil (West Texas Intermediate), Natural gas plant liquids, and natural gas, based on EIA data.

Figure 4. Price Comparison per Million Btu for Oil (West Texas Intermediate), Natural gas plant liquids, and natural gas, based on EIA data.

This drop  in NGPL price occurred because the US market for at least some components of this grouping became saturated. With too much supply for demand, prices dropped. Excess ethane, for example, could be sold to be burned as natural gas, putting a floor under its price. As a result, recent prices seem to be influenced by changes in natural gas prices.

With the drop in NGPL prices, we hear more talk about the need for exports. We don’t really have use for all of the low value products that are being produced, other than to burn them as part of natural gas. Perhaps someone else does. If someone else does, it might get the price back up.

What is the Real US Trend in Production/ Consumption?

The US EIA makes fuel comparisons based on Btu energy content. This approach makes it easy to see how much of our fuel is US produced, and how much is imported (Figure 5).

Figure 5. Comparison of US production and consumption of oil plus NGPLs, based on EIA data.

Figure 5. Comparison of US production and consumption of oil plus NGPLs, based on EIA data.

Production is indeed rising, but it is still far below consumption–about 55% of consumption in 2013. Many articles make this situation confusing.

The emphasis in most news reports is the drop in imports–that is the difference between the blue line and the red line in Figure 5. If we look at the chart, though, we see that a big reason for the drop in imports is a drop in consumption, with the big step down coming in 2007 and 2008. Oil use is associated with jobs. It takes oil to make and transport goods. Also, workers with good jobs can afford cars and the oil to operate their cars. If they remain students forever, they can’t afford cars.

A person can better see the drop in consumption by looking at consumption on a per capita basis.

Figure 6. US per capita oil and Natural Gas Plant Liquids production and consumption, based on EIA data.

Figure 6. US per capita oil and Natural Gas Plant Liquids production and consumption, based on EIA data.

If prices don’t fall, consumers don’t feel the effect of more production. What they do feel the effect of is falling consumption-the top line. Young people especially have been finding it hard to get good paying jobs. With all of their student loans, it is hard to be able to afford to get married and buy a house. This holds down demand for new homes, and all of the things that go into new homes.

If we look at total per capita energy production and consumption in the US, we see even more of this trend. While production per capita is rising, an even bigger issue is falling consumption.

Figure 7. Total per capita energy production and consumption for the US, based on EIA data.

Figure 7. Total per capita energy production and consumption for the US, based on EIA data.

US per capita energy consumption has been dropping since 2000. 2000 is the year of peak US employment, as a percentage of the total population.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 8. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate. (Sorry, not updated.)

With a smaller percentage of the US population employed (and lagging salaries for those employed), US consumers cannot afford to buy as large a quantity of energy products. Rising US oil production is not really helping US consumers, because at its high price, we cannot really afford it.

Rising oil production has not brought down oil price, making it more affordable. In fact, the situation is the reverse–high prices are needed for today’s oil production. It is questionable whether today’s prices are even high enough. Oil companies have to  keep adding debt, to keep extracting oil.  The EIA recently wrote an article about the situation called, As cash flow flattens, major energy companies increase debt, sell assets. Steven Kopits shows this chart of cash flows for Independent Oil Companies in a recent post.

Figure 9. Image by Steven Kopits showing Free Cash Flow of US independent oil and gas producers, from Platts Guest Blog.

Figure 9. Image by Steven Kopits showing Free Cash Flow of US independent oil and gas producers, from Platts Guest Blog.

With negative cash flows, companies have to keep increasing their debt levels–something that eventually becomes impossible.

When those producing the oil see that US oil prices are at times not as high as world oil price (Brent), they hope that selling their crude to world export markets, they will be able to get higher prices for their crude. If they are successful, there will be less crude available sold to US producers, perhaps raising the price of this crude sold in this country as well. The net impact may be higher prices for US consumers, making the US consumers even less able to afford the oil products.

Energy Growth is Needed for Economic Growth

There is a close tie between energy consumption and economic growth. Perhaps my statement “Energy growth is needed for economic growth,” in the header is a little too strong. Perhaps if energy consumption is flat, with the benefit of technological progress and efficiency changes, there can still be economic growth. There is definitely a connection, though. Energy of the right type is needed for every process we can think of–getting to work, shipping goods, operating our computers, heating metals when they are refined.

The problem comes when what we are facing in shrinkage of energy consumption, over and above what can be accommodated by technological progress and efficiency. Figure 7 hints that this is already happening. Then we have danger of a collapsing financial system, as the low energy consumption growth pushes the economy toward contraction. The economy has been held together since 2008 with quantitative easing and zero interest rates. The plan has been to allow consumers more income to spend, by keeping interest rates artificially low. I heard an excellent presentation on this subject recently called Global Financial System on Life Support by Roger Boyd.

Conclusion 

I wrote a post recently called The Absurdity of US Natural Gas Exports. The situation with exports of crude oil is not quite as absurd. The issue is that current oil refineries are not configured for the influx of very light oil. Many of them are busy “cracking” long hydrocarbon chains, often using imported oil as their energy source. If US oil producers have the option of selling their crude oil abroad, perhaps they can get a higher price for it. If US oil producers can get higher prices for their oil, this may very well filter through to higher oil prices for US consumers, and less oil consumption by US consumers, but this is not the concern of oil companies.

A major concern with falling per-capita energy consumption it that the financial system may soon reach limits where it is stretched beyond what it can stand. The economy needs energy growth to grow, but the economy is not getting it.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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1,009 Responses to Making Sense of the US Oil Story

  1. InAlaska says:

    J. I was unfortunate enough to be in a Walmart a couple of weeks ago on one of my provision runs into town from our remote homestead. As I walked around and looked at the unhappiness on the faces of everyone in there, coupled with the sheer amount of cheap crap for sale, I almost ran out and vomited in the parking lot. It was like the tactile realization of the accumulating ruin of North America all came rushing at me at once. I’ll check out that link.

    • Paul says:

      IA — I feel the same sort of thing when I go to a Costco or Walmart when I am in Canada

      I went there to buy some shaving blades a couple of weeks ago — automatons roaming around in zombie trances stuffing super sized packages into super sized shopping carts — people programmed to shop by Edward Bernays acolytes…

      I look at this — and I get an strong sense of discomfort — I think is this what we have become – I shop therefore I am?

      Then I look at the traffic jams and I think look at all those cars — they are all filling up once a week — and I think this is just one traffic jam – how many cars across the entire world are there — all filling up once a week — and I think where in the hell does all the oil come from to fill up all these cars? It truly is amazing that we have not run into a problem sooner — the amounts involved here truly are staggering…

      I used to thrive in the city having lived in Hong Kong for many years — but now I feel as if I am on another planet when I go anywhere near a metropolis… I feel nothing but a sense of unease because it reminds me of how we are raping the planet to death.

      • InAlaska says:

        Paul,
        You totally captured how I feel when I have to engage the beast. All of the zombie people living their lives under the sword of Damocles and they don’t even know it. And like you say, this is just one place in one town, in one state, in one country in a world full of places doing the exact same thing. It truly is staggering that we have burned through half a billion years of solar energy and photosynthesis in 200 years just to create a world full of crappy junk that is designed to break. We’ve scraped the crust of the earth for all its easy minerals and cast millions of years of soil into the wind, used the ocean and the atmosphere for a sewer…and for what? McDonalds, WalMart and Ford Motor Company. Its disgusting. We haven’t earned the right to remain on this once beautiful planet.

        • Paul says:

          “We haven’t earned the right to remain on this once beautiful planet.”

          Absolutely.

          We have maxed out on wrath, avarice, sloth, pride, lust, envy, and gluttony.

          At risk of being a hypocrite, unfortunately we are all participants in this — it is just a matter of degree… but then what choice do we have — even if one were to go off grid and life off the land… what difference would it make?

          But that said, it is still disturbing and embarrassing to see this behaviour from our species.

          I was in the pasture here in BC pulling out thistles earlier — we let the neighbour graze his cows here so a dozen of them were up there including a 2000+ pound bull… they all surrounded me and watched me for a few minutes — I pulled some grass and the big bull approached — and took the grass — i patted the big guy and scratched his ears… the other cows gathered closely … trusting…

          The level of innocence in those animals… shame on us for doing this.

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  4. Vassilis Serafimakis says:

    Dear Gail, on August 6, 2014 at 8:25 pm you wrote:
    “…The issue I am concerned about is the fact that governments are funded by the surpluses of an economy. If we hit recession again, governments will be hard-put to collect enough taxes, to fund broken banks and pay unemployment to workers.”

    The United States is a fiscally and monetarily sovereign nation, with a monopoly on issuing its national currency. It follows, rather directly if not automatically, that the U.S. is always solvent in debt denominated in that currency. I’d challenge anyone to offer a scenario whereby the U.S. is insolvent in U.S. dollars.

    The government collects taxes not to fund its expenses but mainly to regulate disposable income (and, through that, effective demand), and to redistribute said income according to the government’s political views. It would be absurd to believe that the U.S. government “needs” something, e.g. U.S. dollars, when that “something” is created solely by the same U.S. government!..

    All the dollars in the world are the creation of the U.S. government, either directly or indirectly (through the privilege afforded to private banks to create (give out) loans denominated in U.S. dollars). Note that this has nothing to do with the “real” economy.

    When all is said and done, all that remains to put in place are accounting entries.

    • the US may appear solvent in monetary terms, but that is an irrelevance
      The critical factor is energy
      The USA uses 18mbd of oil, produces 10Mbd, and imports the remaining 8Mbd
      This like saying you have an expenditure of $18 per day, earn $10 per day and borrow 8$ to make up the difference.
      You are in sub prime territory, and this is unsustainable

    • Debt is only a claim on future resources. If the resources, particularly energy resources, aren’t there, the debt does not have any real value. Either the system falls apart, of the debt when someone tries to make use of the $$ generated by its dollars doesn’t buy much.

      It is resources, including energy resources, that count. Money and debt are only vehicle for transferring these resources. Debt attempts to transfer resources forward in time. But this may not really be possible.

      • Don Stewart says:

        Gail
        I think that debt can be used to facilitate investments which should never have been made. These are frequently called ‘malinvestments’. For example, many people think that our society is giving current resources to the shale companies in return for their high yield bonds. On a larger scale, people give current resources to the US government in return for Treasury bonds. Yet there is a considerable likelihood that neither of these categories of bonds will be worth very much when one tries to trade them in for future resources.

        The automobile companies are giving current resources, assembled automobiles, to sub-prime credit risks in return for their signature on a piece of paper. This is a little more complicated, since the car can be repossessed. So it is not clear whether the car finance companies are taking advantage of the poor credit risks or vice versa. Just after 9/11, I drove by a huge lot of repossessed double-wides in Virginia. There was a big sign: Support The American Way of Life. Most objective observers have concluded that the double-wide finance companies are essentially loan-sharks.

        We should also be aware that psychology studies always show that people think everything will be easier in the future. I can have the dessert today, because I know I can start the diet tomorrow, when it will be easier. I can borrow against my paycheck today, because I know that I will be able to control discretionary spending next month, and have plenty of money to pay back the loan. Right up to the Federal Government, which thinks it can spend lots of money on the military today because this time we really will ‘win the peace’ and have a ‘peace dividend’ next year so that repaying the bonds will be easier.

        Don Stewart

        • Unfortunately, it is these mal-investments that are what keeps up demand for oil and other fossil fuels, and keeps the whole system operating.

          • Paul says:

            Likewise with other resources such as copper and steel — the ghost cities in China are what’s driving the market for those materials

            • PeterEV says:

              China’s population is 1400 million (1.4 billion). A one percent increase in their population is 14 million. The population of New York City is 8.5 million. So basically, if they expect a 6/10 of 1% rise in their population in one year (population doubling once every 120 years), they could fill a New York City.
              The important questions are:
              How many are being born each year?
              How many are dying each year?
              That should put the “ghost” cities into perspective. Their leadership is evidently thinking that it will rise. If not, why not build something more useful? Fishing boats? Oil Derricks? Solar Farms?

            • Paul says:

              I have lived in China — when you hear that millions are moving to cities most of these people are peasants — dirt poor — they cannot afford to rent high rise apartments…

              So what if you have population increasing — if they are poor they will not take up the relatively expensive housing that is being built (average wage in Shanghai is only about $7000 per year http://www.lexology.com/library/detail.aspx?g=f226814d-f67f-443f-b320-1b2bd7ec546c)

              We have some business in Shanghai — the guy who runs was telling me recently that he visited one of these ghost towns — hundreds of villas – he saw only a few people — the properties were a couple of years old and falling to pieces already … you cannot leave housing empty for years without it breaking down…

              How many flats in China are sitting empty? The media recently floated a story – denied by power companies – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people http://english.caixin.com/2010-08-03/100166589.html

            • PeterEV says:

              I think you have to look at the dynamics and take that into consideration. Where are these migrating peasants going to live that are moving into the cities? I assume they move in with friends, relatives, or someone creates a “bunk house” apartment or company dormitory. When we had an oversupply of housing and a recession, housing prices fell. As a Chinese leader or a banker with my capital tied up in these projects, I can not see them not trying to find a solution. A very very slight increase in population and they **could** fill one of those cities by the numbers. That is what I would expect to see. Filling 64.5M unused apartments is a very tall order and points to a lot of stupidity.

              Will there be other dynamics?? Sure. Peak Oil, food supplies, job opportunities, etc. all play a part. Will the Chinese leadership direct companies and people to move operations to these cities? I think it is likely. Especially if the population grows but that appears that will be coming to an end.

            • Paul says:

              The primary reason you have a credit crisis in China — which the PBOC is holding at bay by printing more money and lending it to insolvent entities so that they can pay the INTEREST on loans they will NEVER repay…

              Is because of the massive investments that have been made in things that are not needed. There are not enough people to pay rent on these millions of apartments — so they sit empty year after year after year….

              That is not the way an economy works — it’s not like the movie Field of Dreams — build it they will come….

              That does not work — because if you build it — and they don’t come soon — you are bankrupt — if you build 64 million and they remain empty — the banks are bankrupt…. (and the assets deteriorate)

              That is the situation in China …. tick tock

            • PeterEV says:

              I hear you and it is distressing as you paint it.

              64 million apartments divided by 1400 million Chinese is 4.5% If my neighborhood has 100 houses, that is like building 4.5 extra houses. The kid next door is graduating and so are a few others. Where are they going to live? Likely in an apartment vacated by someone who is likely to buy one of those houses.

              China has a “Command Economy”. I assume that the leadership can direct a number of “surplus” people and industries to these new cities. Is there overcrowding by 4.5% in other cities?

              Again, this all depends upon dynamics.
              Is the economy of China still growing at 7%?
              Does China have upward mobility?
              Are more people being born than dying?
              Can the rents be lowered so the loaners take a haircut instead of a bath?
              As pressures mount to do something, what will they do?
              These maybe greedy people but they are not stupid.

              We were greedy ala the housing bubble until 2008. We used a lot of creative finance to keep the banks from imploding. It was/is a real mess but we are still limping along. A lot of predictors of doom made the mistake of putting dates to their doom predictions. We are still here.

              Please do not take this to mean that I do not think they are right wrt their doom forecasts. We are in trouble but I have seen troubles go on for a lot longer than forecast. Catherine Fitts (Solari Report) says she saw the housing bubble coming in 1997; the year my parents bought a condo. We helped him sell it for double the price in 2005 because I thought 2006 was going to be the year the bubble popped. It wasn’t until later that it actually popped. In the meantime, that condo resold for 20% more in 2006. In 2011, it was on the market for half the peak price **and it did not sell**. My father made out okay but someone is sitting on a large investment that has turned sour. They still have the condo. What are they going to do with it???? What would you do with it?

      • Vassilis Serafimakis says:

        How is $1 billion of U.S. government debt a claim on future U.S. resources? What right does government debt paper give to its owner on U.S. real resources, today or in the future? We agree that it’s real resources, i.e. real products and real services, that matter. We also agree that it is on these real resources that our planning for the future should be – and not on mere convention such as money and debt. This means that the claims about, for instance, Social Security not being solvent are pure, unadulterated bull.

        • by the very nature of our way of life, we all make a claim on the future.
          If your pension (as an example) is to pay out sufficient money between your retirement age and death, which could be 30 years, then there has to be sufficient economic activity to support that.
          And as the ultimate source of all real wealth derives from burning fuel of one sort or another, then your future is directly linked to the constant availability of fuel sources.
          Those who convince themselves that wealth derives from passing money hand to hand (Krugmanomics) are in for a very nasty shock.
          The reality is that we do not have a future, because the will be no energy sources to support it.

          • Vassilis Serafimakis says:

            Wealth, in any case, does not derive from passing money around (Paul Krugman does not advocate anything like that). You do not seem to understand the gigantic difference between money and real products & services. To begin some measure of understanding try to realize that, although money has no tangible use (we cannot eat money), a “free-market economy” cannot function without money.

            • Paul says:

              Wealth actually ultimately derives from energy — particularly oil — particularly oil that is low priced but not so low that companies will not extract it.

              Krugman from what I can see believes we need to stimulate the economy (he’s never seen a stimulative policy he did not like — and there is never enough)…

              On the surface that would appear idiotic — however let’s assume Krugman understands that we are out of cheap oil — so the only way to grow the economy is by pouring on more stimulus to counter the impact of expensive oil — and to keep the price of oil from collapsing…

              If he is aware of the real problem we are facing — and surely he must be — he knows stimulus will not result in a recovery — but it will keep civilization going a bit longer.

            • to quote Krugman:
              My neighbour’s spending pays my wages, my spending pays his wages

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