American Oil and Gas Reporter - March 2018 - 120

Report Contextualizes U.S. Oil Growth
CHICAGO-Although headlines about
growing U.S. crude oil production cite
significant milestones and point to the
United States' ascent among the world's
top producers, an analysis by Morningstar
Commodities Research suggests some perspective is in order. By considering the
difference between the absolute production
numbers and their relative scope within
the market, the report suggests that while
U.S. production growth is noteworthy, its
importance should not be overstated.
Citing U.S. Energy Information Administration statistics, the analysis notes
that U.S. crude production passed 10.0
million barrels a day in November, pushed
to 10.2 MMbb/d in January, and projects
to average 10.6 MMbbl/d in 2018 and
11.2 MMbbl/d in 2019. Although such
figures indicate U.S. oil output has surpassed that of Saudi Arabia and is on a
pace to overtake Russian production next
year, Morningstar warns against irrational
exuberance.
"Significant hyperbole surrounds this
turn of events brought about by a dramatic
increase in domestic shale production the
past five years. We wondered if the hype
was deserved," the report states. "In
reality, U.S. crude production today meets
just 56 percent of domestic needs, compared with 89 percent in 1970, and its
share of world output has fallen to 12
percent in 2017 from 21 percent in 1970."
Similar Piece, Bigger Pie
Morningstar notes that U.S. onshore
production peaked at an annual average
of 9.6 MMbbl/d in 1970 before beginning
a 38-year decline to 5.0 MMbbl/d in
2008. U.S. output grew 4.0 MMbbl/d between 2010 and 2015, it notes, slipped
by 600,000 bbl/d in 2016 and gained 5
percent in 2017 to average 9.3 MMbbl/d.
The projected totals of 10.6 MMbbl/d in
2018 and 11.2 MMbbl/d in 2019 represent
increases of 14 and 6 percent, respectively.
Moreover, U.S. totals already have pushed
to new highs, the report says, citing EIA
numbers indicating that production in
December 2017 and January 2018 already
surpassed the previous record of 10.04
MMbbl/d set in November 1970.
Impressive as that is, Morningstar
points out that U.S. and global oil markets
have changed markedly since then. "At
the time, U.S. production of 9.6 MMbbl/d
represented 89 percent of the 10.9 MMbbl/d of crude processed by domestic refineries, with average imports of 1.3 MMbbl/d (75 percent from Venezuela and just

2 percent from Saudi Arabia) meeting the
balance of demand," it observes. "There
were 276 U.S. refineries in 1970, according
to EIA data, with operating capacity of
12.0 MMbbl/d. Today there are half as
many refineries (137) with 55 percent
more capacity (18.6 MMbbl/d), meaning
that average refinery size has more than
tripled from 43,000 bbl/d in 1970 to
136,000 bbl/d as of Jan. 1, 2017. Despite
returning to 1970 levels last year, the 9.3
MMbbl/d of crude production in 2017
represented just 56 percent of the 16.6
MMbbl/d processed by refineries."
The analysis notes that when U.S.
corporate average fuel economy standards
debuted in 1975, U.S. passenger vehicles
averaged 13.5 miles a gallon, compared
with a fleetwide U.S. average of 35 mpg
in 2016. However, it observes, the 120
million people added to the U.S. population
and the country's 244 percent growth in
vehicles more than offset fuel efficiency
improvements.
"So, while Americans drive more efficient vehicles today, the larger driver
and vehicle populations require increased
refinery output to meet domestic demand,"
Morningstar says. "At the same time,
U.S. refineries are exporting more gasoline
and diesel than ever, adding to the demand
for crude feedstock."
Another striking contrast between 1970
and 2018 to which the analysis points
deals with global market share.
"In world terms, the United States
was easily the world's largest crude producer in 1970 with 9.6 MMbbl/d, followed
by Russia with 6.3 MMbbl/d, and then
Iran and Saudi Arabia with 3.8 MMbbl/d
each (according to the Organization of
Petroleum Exporting Countries)," Morningstar recounts. "In 2017, Russia was
the largest producer with 10.3 MMbbl/d,
followed by Saudi Arabia at 10.0 MMbbl/d
and the United States in third place with
9.3 MMbbl/d."
Moreover, Morningstar indicates, in
1970, OPEC accounted for 50 percent
and the United States 21 percent, respectively, of the world's 45.2 MMbbl/d production. By 2017, OPEC had 43 percent
and the United States 12 percent of the
75.3 MMbbl/d worldwide crude oil total.
"During those 47 years, U.S. production
declined and has only just recovered to
its previous peak, while OPEC production
increased 43 percent from 22.6 MMbbl/d
in 1970 to 32.4 MMbbl/d in 2017," the
report says. "While OPEC and the United
States both have lost market share, OPEC

120 THE AMERICAN OIL & GAS REPORTER

retained a higher portion of world output
while the U.S. stood still."
Extra Influence
Although considering various metrics
may moderate some of the excitement
around U.S. crude production, Morningstar
says the country still figuratively punches
above its weight.
"Within this changing picture over the
past 47 years, the relative clout of U.S.
crude production is higher today than
pure numerical analysis suggests it deserves," the authors reason. "That is because shale producers increased output
so rapidly-by 4.0 MMbbl/d between 2010
and 2015-and appear set to do so again
in 2018 after recovering from the price
shock of 2015. This proven ability to
turn on the taps even with lower prices
means the United States is set to become
not only the world's largest producer, but
also the marginal player ramping up production to meet new demand."
According to Morningstar, the United
States is guaranteed the role of swing
producer as long as OPEC and its allies
restrict production and strengthen prices.
"The OPEC agreement effectively
hands market share to U.S. producers on
a plate," the analysis asserts. "The only
remedy for OPEC to combat the loss of
market share is to repeat its 2015 strategy
of flooding the market to drown shale
producers, a tactic that failed then and
probably would fail again. Until then, a
rising tide of demand should absorb growing shale output in the form of increased
exports, allowing the United States to regain its number-one producer crown, together with an outsized influence on the
world market."
r

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American Oil and Gas Reporter - March 2018

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