Unforeseen U.S. oil boom upends markets as drilling spreads

Hydraulic Fracturing

The U.S. gains were made possible by innovations in horizontal drilling and hydraulic fracturing, or fracking, that have unlocked fuel trapped in underground rock. The technology allows producers to bore horizontally, then use explosives and a high-pressure stream of water, sand and chemicals to blast open fractures that free the oil.

The process comes with environmental risks. A 2011 U.S. government report found fracking chemicals in groundwater in Pavillion, Wyoming, and in June, 47 people died when an unmanned train carrying Bakken crude derailed and exploded in Lac Megantic, Quebec. Crude from the Bakken may be more flammable and more dangerous to ship than other types of oil, the U.S. Transportation Department said Jan. 2.

Fracking is also more expensive than traditional extraction. Drilling a horizontal shale well in the Bakken can cost 10 to 20 times what a vertical well might cost, according to Austin, Texas-based Drillinginfo Inc. Production from shale wells declines by 60% to 70% in the first year, while output from traditional wells diminishes by as much as 55% in two years before flattening out, according to Drillinginfo.

Import Need

One reason the U.S. still depends so much on imports is that demand continues to outstrip domestic supply. Another reason is the quality of crude its refineries can handle. Many of them performed expensive upgrades in the past decade so they could process oil from overseas that was more difficult to turn into transportation fuel.

Gasoline users and diplomats benefit from the surge in U.S. production. While the 2011 Libyan uprising had U.S. consumers paying almost $4 a gallon for gasoline, pump prices declined 1.3% last year and averaged $3.31 a gallon yesterday, according to AAA, the largest U.S. motoring organization. That was even after sanctions cut off more than 1 million barrels a day of Iranian oil exports. Starved of their primary source of cash, the Islamic republic’s leaders in November reached an agreement to curb its nuclear program.

“It took time to realize how significant this transformation was going to be,” said Jason Bordoff, who was an energy adviser to the National Security Council and helped draft Obama’s 2011 speech. “We were able to impose pain on Iran without imposing pain on ourselves.”

Rail Routes

New rail routes and pipelines are carrying increasing supplies of crude from North Dakota, Oklahoma and elsewhere to refiners in New Jersey, Louisiana, Texas and Pennsylvania. They are in turn sending cargoes of diesel to London, Rotterdam and Antwerp, Belgium. U.S. fuel exports to the Netherlands, a major import hub for the region, reached a record in September, according to the EIA.

The one-two punch of declining crude imports followed by rising fuel exports hit the refining industry in Europe and the U.K. particularly hard. That’s because refiners outside North America typically buy oil based on the price of Brent crude, a North Sea grade that last year cost an average of almost $11 a barrel more than West Texas Intermediate, the U.S. benchmark.

WTI futures on the New York Mercantile Exchange settled at $92.33 a barrel today, $14.82 below the Brent price of $107.15 on ICE Futures Europe in London. It was the widest spread at the close since Dec. 3. The spread widened to a record $27.88 a barrel in October 2011.

“When historians write this story 10 or 20 years from now, they are going to look at a very different U.S.,” said Verleger, the former Treasury Department official. “Everything has changed.”

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