One of the encouraging domestic developments of the past decade has been the United States' reduced reliance on foreign oil. Increased production coupled with reduced consumption has cut net imports from 12.55 million barrels per day in 2005 to 7.72 million barrels in the first 10 months of 2012.
As the biggest consumer of oil, this has a big impact on the worldwide market and may have some interesting repercussions over the next decade. Europe is taking a similar path of reduced consumption, partly driven by its never-ending recession, but the major shift comes as China's dependence on foreign oil grows. As the U.S. and Europe reduce oil imports and oil consumption, a growing Chinese economy, and surging middle class, has shot demand for oil higher in China. Since China doesn't have nearly enough oil to support its own economy, its imports are rising, which could cause a role reversal as it slowly becomes dependent on foreign oil.
Where we are
Any look at the oil market globally requires a look at consumption. Consumption drives prices, production, and eventually imports around the world. Since 2000, oil consumption has grown fairly consistently worldwide, outside of a dip during the Great Recession. What's interesting to note in the graph below is that both the U.S. and Europe have reduced oil consumption by 3.8% and 5.5%, respectively, since 2000, while China has increased consumption by 86%.
This is due largely to China's growing economy, but it also has to do with more efficient vehicles in the U.S. and Europe. Ford and GM were selling SUVs like hotcakes in 2000, but today's consumer prefers a more efficient vehicle. This has helped push demand lower in developed nations.
Meanwhile, as demand shrinks in the U.S., production has exploded. Shale drillers like Kodiak Oil & Gas (NYSE: KOG ) and Continental Resources (NYSE: CLR ) have exploited a previously uneconomic resource under our feet and production continues to rise, making oil independence a real possibility.
Imports heading in opposite directions
We were once worried about our growing dependence on foreign oil, particularly from less than friendly trade partners in the Middle East. We've fought two wars in Iraq, and had countless other skirmishes, in large part because these were such important trade partners.
The chart below shows that oil imports are falling in the U.S. -- that trend had continued throughout 2011 and 2012. What should be alarming for China is its rapidly growing reliance on foreign oil. If the country's current rate of import growth continues, then it will soon pass the U.S. as the biggest oil importer in the world.
This will have a resounding effect around the world for decades to come.
What's important about the information above can be seen in the constant conflict in the Middle East. As the U.S. reduces reliance on foreign oil, our trade interests in the Middle East become less crucial to the economy. Meanwhile, the area becomes more critical to China because the country imports most of its oil from that region.
The tables are turning from the Middle East being of strategic importance to the U.S. to it being extremely strategically important to China. This has a big affect on the geopolitical dynamic around the world.
Investing for a changing world
So, if imports are falling in the U.S. and growing in China, what does it mean for investors? First, it means that the U.S. oil transportation infrastructure will need to change, which provides new opportunities for midstream companies like Enbridge (NYSE: ENB ) and Kinder Morgan (NYSE: KMI ) .
Second, if the two largest users of oil are reducing consumption then it could have a downward affect on prices. This is why I'm currently avoiding companies tied heavily to the price of oil. But it doesn't mean that oil is suddenly easy to find. So, investors should look at companies that make, or own equipment that makes, oil extractable in new fields of shale or ultra-deepwater. Schlumberger (NYSE: SLB ) and Halliburton (NYSE: HAL ) are two major suppliers to oilfields, and Seadrill (NYSE: SDRL ) and Transocean (NYSE: RIG ) are great ways to play the growth in ultra-deepwater drilling.
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