Rising U.S. oil production spells end of era for high gas prices

FED UP

Brent crude went crazy as Libyan oil exports were not to be, and today oil (NYMEX:CLF14) prepares for the Fed meeting. The Fed flinched when they were supposed to taper, so the odds are that the Fed will not taper ahead of Christmas. The Fed won’t taper as it would be unwise to upset the markets as volume dwindles toward the end of the year. While U.S. economic data has been stronger, the lack of inflation could be a factor. If the Fed can still juice the economy without the fear of inflation, why would the Fed want to stir the bond yields (CBOT:ZNH14) and the bond vigilantes ahead of the holiday? The Fed would not.

While the Brent crude market has increased risk, the U.S. barrel is running over. This week we should see U.S. crude supply rebound as tankers that were delayed due to fog in the Houston Shipping Channel should have unloaded their oil. Yet despite the dramatic two-week drop in supply, overall supply is still near a record high for this time of year. Our crude abundance comes from our own production that, according to the Energy Information Administration, is only going to get better this year.

The U.S. Energy Information Administration’s new “Today in Energy” brief looks at the projections from the EIA’s new long-term energy outlook for the United States through the year 2040, including U.S. oil production nearing its 1970 all-time output high in a few years. The EIA says that the increase in U.S. production is not a fluke and the U.S. will be an oil producing force that will have to be reckoned with.

The EIA says that in 2016, crude oil production is expected to be close to the historical high of 9.6 million barrels per day, a record set in 1970. While domestic crude oil production is projected to level off and then slowly decline after 2020, natural gas production grows steadily, with a 56% increase between 2012 and 2040, when production reaches 37.6 trillion cubic feet.

They say that low natural gas prices boost natural gas-intensive industries. Industrial shipments are expected to grow at 3.0% per year over the first 10 years of the projection and then slow to 1.6% annual growth through 2040. Bulk chemicals and metals-based durables account for much of the increased growth in industrial shipments. Industrial shipments of bulk chemicals, which benefit from an increased supply of natural gas liquids, grow by 3.4% per year from 2012 to 2025. The competitive advantage in bulk chemicals diminishes in the long term. Industrial natural gas consumption is projected to grow by 22% between 2012 and 2025.

The EIA says that natural gas (NYMEX:NGF14) overtakes coal as the largest fuel for U.S. electricity generation. Projected low prices for natural gas make it a very attractive fuel for new generating capacity. In some areas, natural gas-fired generation replaces power formerly supplied by coal and nuclear plants. In 2040, natural gas accounts for 35% of total electricity generation, while coal accounts for 32%. Generation from renewable fuels, unlike coal and nuclear power, is higher in the AEO2014 Reference case than in AEO2013. Electric power generation from renewables is bolstered by legislation enacted at the beginning of 2013 extending tax credits for generation from wind and other renewable technologies.

Higher natural gas production supports increased exports of pipeline and liquefied natural gas (LNG). In addition to increases in domestic consumption in the industrial and electric power sectors, U.S. exports of natural gas also increase. U.S. exports of LNG increase to 3.5 trillion cubic feet (Tcf) before 2030 and remain at that level through 2040. Pipeline exports of natural gas to Mexico grow by 6% per year, from 0.6 Tcf in 2012 to 3.1 Tcf in 2040. Pipeline exports to Canada grow by 1.2% per year, from 1.0 Tcf in 2012 to 1.4 Tcf in 2040. Over the same period, pipeline imports from Canada fall by 30%, from 3.0 Tcf in 2012 to 2.1 Tcf in 2040, as more demand is met by domestic production.

Car and light truck fuel use declines sharply. Annual increases in vehicle miles traveled (VMT) in light-duty vehicles (LDV) average 0.9% from 2012 to 2040, compared to 1.2% per year projected over the same period in AEO2013. The rising vehicle fuel economy of LDVs more than offsets the modest growth in VMT, resulting in a 25% decline in LDV energy consumption between 2012 and 2040.

This is in line with my prediction that we are in the end of an era of higher gasoline prices. More oil production coupled with alternatives will change the future.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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