America's Next Boom

Things change fast in modern economies. One of the biggest changes of the last decade is America's boom in energy production. Scan through an archive of news stories from 2006, and you'll find headlines like "U.S. oil imports at record high." Scan through today's news, and you'll find headlines like, "U.S. oil imports to fall to 25-year low."

For years, it was assumed that America's insatiable appetite for oil would spike prices and balloon the trade deficit. But this fear relied on two assumptions: That domestic energy production had peaked, and that demand for oil would continue to rise. Both turned out wrong. As a result, net oil imports in 2012 hit the lowest level since 1993, and are on track to fall to the lowest level since the 1980s next year. It is one of the most important economic developments of the last decade. And by most accounts, it's just getting started.

A few charts tell the story.

The first is energy demand. A good way to measure it is total crude products supplied, or the amount of oil the economy is consuming:

Source: Energy Information Agency.

We consumed less oil in 2012 than we did in 1997. Consider that the U.S. population grew by 43 million during that period, and the change is extraordinary. 

Part of the decline -- perhaps most -- is due to the weak economy. Less employment and lower incomes means fewer vacations, fewer road trips, and putting on a sweater in lieu of turning up the heat. After rising uninterrupted for three decades, Americans drove 40 billion fewer miles in 2012 than in 2005.

But another downward push on demand is efficiency. Daniel Yergin, an energy analyst who won a Pulitzer for his book, The Prize, calls energy efficiency and conservation "the fifth fuel," writing that, "many would not even think of it as a fuel or an energy source. Yet in terms of impact, it certainly is." He goes on:

The United States uses less than half as much energy for every unit of GDP as it did in the 1970s … a new car in the 1970s might have averaged 13.5 miles to every gallon. Today, on a fleet average basis, a new car is required to get 30.2 miles per gallon.

The boost in efficiency and conservation is mostly driven by price. Changing behavior requires incentives. "The key to high prices is high prices," as the saying goes.The last conservation push that led to a drop in demand occurred in the early 1980s, coming off an oil shock and soaring gas prices. The 2008 oil spike looks like it also changed consumer behavior. The vehicles that capture our imagination shifted from Hummers and Excursions to Teslas and hybrids. 

Beyond falling demand, domestic oil production is booming like it hasn't in decades.

For as long as we have been drilling oil, we have been worried that we're on the cusp of running out of it. Yet, the story ends the same way every time: Tight supplies push prices up, and higher prices provide the incentive for oil companies to invent new ways to extract more oil out of the ground than we ever knew existed.

Last decade was no different. Conservation complacency of the 1990s, combined with burgeoning demand from Asia, sent oil prices from $11 a barrel in 1999, to $140 a barrel by 2008. It was terrifying -- many thought we hit a point where oil prices could only go up and, in 2008, the CEO of energy giant Gazprom predicted oil would soon hit $250 per barrel. But those high prices made if feasible for oil companies to utilize and improve technology. Fracking -- cracking oil out of rock formations with pressurized water and sand -- and horizontal drilling, took off.

"The key year was 2003,” Yergin recently told NBC. "That was when it was proof of concept. So for five years, it unfolded quietly with the independents. In 2008, that’s when the majors got interested.” Chesapeake Energy's (NYSE: CHK  ) 2004 annual report doesn't contain a single mention of the words "hydraulic fracturing." Last year, the words appeared 57 times.

The results have been epic. U.S. oil production grew more in 2012 than it has in any year since the dawn of the oil industry in the 1800s, according to the Wall Street Journal:

Source: Energy Information Agency.

Put the two trends of falling demand and higher production together, and America's reliance on foreign oil is declining. After peaking in 2005, net oil imports have declined by almost half, and are now at the lowest level since 1992:

Source: Energy Information Agency.

The impact this has on the trade deficit is simply massive. On net, we imported 5 million fewer barrels of oil per day in 2012 than we did in 2005. The nation's total trade deficit was a quarter of a trillion dollars lower last year than it was in 2006.

This is good for the economy, and boosts the value of the dollar, but it's also great for geopolitics. Several countries that America previously relied heavily on for oil aren't particularly fond of our way of life, to put it politely. That's now changing. Net oil imports from the Persian Gulf region have declined by a quarter over the last decade. Net imports from Venezuela have fallen by nearly half since 2005. Imports from OPEC nations as a whole have dropped 31% since 2007.

What happens next? The opening line of this article, a reminder of how fast things change, works in both directions. The history of oil booms turning to oil busts is long, so any forecast must be taken with a grain of salt. But the forecasts now making the rounds are nothing short of game-changing. The International Energy Agency predicts America will overtake Saudi Arabia as the world's largest oil producer within a decade -- not as crazy it sounds when you consider that it already happened briefly last November. The Monterey shale formation in California alone is said to hold some 15 billion barrels of recoverable oil.

But finding oil and exploiting oil are two different things. The question in California is whether the state's environmentalists and politicians will play along. Then there's the issue of transporting the oil we pull out of the ground -- largely in the Northern states -- to refineries, located largely along the Gulf. Oil shipments by rail rose 256% in 2012, according to the American Association of Railroads. In his latest letter to Berkshire Hathaway (NYSE: BRK-B  ) shareholders, Warren Buffett said, "All indications are that [Burlington Northern's] oil shipments will grow substantially in coming years." But fully exploiting America's oil potential through rail  seems impractical, if not impossible. The hamstrung Keystone XL pipeline is a good reminder that the gap between what's technically possible and politically feasible can be vast.

But think back to 2008. Billionaire T. Boone Pickens told a Louisiana crowd that our addiction to foreign oil was an unaffordable sap on the economy. "And if we don’t do something it will get worse," he warned. Thankfully, we did.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (24) | Recommend This Article (95)

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  • Report this Comment On March 26, 2013, at 6:52 PM, Darwood11 wrote:

    Well, I'll be the first to dive into the waters.

    I love the chart "Net Imports of Oil and Petroleum Products." It should have a second trace, "Net Imports of Wind and Solar Components as a provider of total energy." Just being facetious.

    The fact is, those wonderful "renewable" technologies contribute but a drop in the bucket to our oil consuming population and pale in comparison to coal and nuclear. It's unlikely they ever will, unless we begin beaming microwaves from space based power plants, which is, of course, "solar" energy.

    I had the opportunity to make a presentation to several groups of Middle School students about "Energy in the U.S." I asked them about where our energy comes from, and how it is used. I presented real, factual data and we engaged in a real dialog about "zero pollution vehicles."

    We also discussed "consumption" in real terms, including smart phones, PCs, tablets, X-Boxes and cars and even school buses.

    I provided slides which pointed out the realities, and I normalized the curves (many people like to present "solar as a percentage of renewable energy" statistics, for example). My slides put everything on the basis of percentage of total energy consumed. It included transportation, industrial and residential segments.

    I went on to provide specific information about sources, and then adjusted for possible sources of energy. We also discussed job opportunities, from engineering to "wind farm technician."

    They loved it! So did I! We were all pumped up by the slides, conversation and possibilities. Yes, I did point out the power of conservation. It's enlivening to talk to people who are not fully brainwashed and retain critical thinking skills. Too bad they aren't adults. On the other hand, one day they will be.

    That was the close to the presentation. I pointed to each group and said "You will be those who address these challenges. You will ALL be consumers, and some of you will work on providing solutions which embrace all of the issues. Those solutions will include a need to provide reasonably priced energy, address environmental concerns and dwinding resources. "

  • Report this Comment On March 26, 2013, at 7:43 PM, hanover67 wrote:

    Most forecasts turn out to be wrong, not only in magnitude but sometimes also in direction. While the economy of the US may have shifted due to more locally produced oil and lower demand, we have still not seen a full recovery from the recession, and neither has the rest of the world, China and Europe in particular. Assuming an improvement in overall economic activity worldwide demand will again rise and upward pressure on prices resume. That may be at a slower rate, but the incentives for exploration are still liable to be there.

  • Report this Comment On March 26, 2013, at 7:47 PM, Vince1172 wrote:

    great article

  • Report this Comment On March 26, 2013, at 7:53 PM, gkirkmf wrote:

    Morgan,

    You surprise me... you forgot the charts that shows how much more costly the retrieval of this new oil (off shore and shale) is compared with the cost of the old way of doing business. It would also have been nice to see the charts which graph new discoveries vs depletion. Only a fool (lower case "f") thinks that resources are infinite. Those that are not fooled, realize that this country has to think in terms of decades, not what is happening now. Happy motoring will come to an end... especially at the rate we are depleting our fossil fuels. Not next week mind you... but look out 50 years and figure out how much oil must be discovered to cover the world's happy motoring needs. Our oil price is now a WORLD price... guess where all that oil went that we didn't buy from Venezuela? Yes, It went mostly to China.... Have you seen how their highway system is growing? I like the way you pile it on when you publish an article..... but in the case of oil, a broader perspective might be in order. Keep up the good work.

  • Report this Comment On March 26, 2013, at 8:00 PM, TMFMorgan wrote:

    gkirkmf,

    It is far more costly, but the price of oil has risen nearly 10 fold in the last 12 years. Expensive extraction techniques are now economically viable.

    -Morgan

  • Report this Comment On March 26, 2013, at 8:34 PM, Factkneader wrote:

    Darwood, perhaps your talks should also include a section on Survival Skills in the event that the vast majority of the best informed scientists on the planet are correct in predicting vast changes when the atmospheric CO2 levels pass 400 PPM -- a level not encountered in more than 800,000 years.

    http://www.youtube.com/watch?v=SXHDwdd7Tf8

    Given all the positive feedback loops and acidification of the oceans resulting from unprecedented CO2 levels, the world will likely be a very different and much more tumultuous place when your now brainwashed students reach adulthood. They will more likely be cursing than blessing you in recalling your presentation.Bet the Dow will be below 1000 when they retire!

  • Report this Comment On March 27, 2013, at 2:03 AM, Tangoko wrote:

    in regards to comparing the cost of oil extraction, we tend to forget, or unwilling to admit the cost of war. Let's face it. Most of, if not all, wars have been fought to secure, and to feed our appetite for oil. When all the war related costs are figured in, it would make domestic energy a no brainer.

    Further, figuring in the outlook for our future and the environmental risk, developing green energy is an only viable solution as done in Germany, India and now, believe or not, Saudi Arabia!

    While the immediate (lower) cost easily attracts our attention, that will surely to blind our longer term goal - that is sustainability. If we are to chase the "cheap" fossil energy going for full-fledged shale oil/gas development, as well as tar-sand from Alberta, this game is pretty much over.

  • Report this Comment On March 27, 2013, at 2:22 AM, snapperreef wrote:

    Good article--thanks.

    At one time in the 80s I taught a class in Lotus 123 and when teaching exponents I gave a problem something like what darwood was doing.

    Assuming the earth's crust averages 10 km thick then the volume is (4/3)*pi*R^3 - (4/3)*pi*(R-10000) cubic meters. I used 1m^3 = 6.3 barrels of oil and 85 mill barrels /day consumed to get enough oil to last 850 years if the entire crust is filled with oil.

    Knowing how far from reality that is, the assumption of a 200-300 year oil supply is very optimistic.

    I'm one of those who believes that the CO2 levels will stay fairly constant over the years. We will run out of oil way before we generate enough CO2 to overcome the natural yearly consumption of it by plants and animals. We will have more unpleasant consequences from green energy than from fossil fuel energy.

  • Report this Comment On March 27, 2013, at 2:51 AM, observerbob2013 wrote:

    The point that gets ignored in all these diuscussions is that more oil is being 'rediscovered' than is being discovered. That is that most of the oil mentioned here is not new oil it is simply oil that price has made economic to exploit. Yes there have been new discoveries but mostly it is of techniques of recovery.

    Shale has been around since our grandparents but is only economic if we are prepared to pay enough to make it so both environmentally and financially.

    The real problem is that many alternatives have equally serious environmental problems, Shale is a classic. Biofuel has major effects on food production, etc. Serious geological question are arising about 'fracking' and so on.

    The only real answer is reduction in use, e.g. fuel economy and electricial efficiency combined with the development of energy sources such as wind and solar.

    The dow wont be 1000 because we are inventive and a solution will be found.

  • Report this Comment On March 27, 2013, at 6:31 AM, sevenheart wrote:

    Factkneader- Just a simple, basic math question- Can you express 400 PPM as a percentage? It's like 4/10ths of 1 percent of the atmosphere. If 4/10ths of 1 % will destroy the planet we just as well die now, the planet is too fragile to support life; Perhaps it's the best informed scientists who are brainwashed. How can you ignore that the world hasn't warmed in 16 years according to the latest data?

    As for fracing (no k in fracturing)- it was patented over 60 years ago, every well is fraced at one level or another. Geologically every rock is fractured, fracing is simply used to enhance recovery by controlling the structure of those fractures in proximity to a well bore. Fresh water only really occurs up to 1000 feet in depth, beyond that is typically saline from ancient oceans, Oil and gas occur at greater depths and properly constructed wells do not communicate to water bearing zones.

    Understand the difference between resources, reserves and known proven reserves. Reserves are resources that are projected to be developed for 25 years using current technology. The technology in an iPhone is outdated in 18 months, same with the oilfield.Reserves are a moving target.

    And one final point, 70% of the earth is covered by oceans, of which 95% is unexplored. Please don't be so arrogant as to think that Macondo was the rule and not the exception, there are tens of thousand of safely operating offshore wells, we aren't reverting to stoneage tools to extract tomorrows oil, it gets safer and more efficient by the day. I have over 30 years experience in the oilfield, I've tried to eliminate the esoteric to be understood. Generalization is careless and easy, check your sources carefully no matter what the topic.

  • Report this Comment On March 27, 2013, at 7:13 AM, Canalwalker wrote:

    Enjoy it while it lasts. The EIA estimates that at present rate the Bakken will run out of new sites to drill in 2017. These wells have a high drop-off rate so lack of new drill sites means production will drop like a rock. There is talk of increasing production, so that means picking up the pace of drilling, which means the end will be sooner.

  • Report this Comment On March 27, 2013, at 8:23 AM, Jamesband wrote:

    If you get some of the distributed energy technologies (off grid electricity) like Capstone Turbine (CPST) in full operations locally in residential and commercial, an additional 200% savings in power generations will make the gains we’ve had in the past decade seem like a drop in the bucket comparatively. Big electric grid, and the combustible engine manufacturers best see the forest from the trees, America’s next jump will be to onsite power generation and co-generation, the grid, and it’s exorbitant cost to taxpayers, and a double whammy monthly utility bill, is fast becoming unpopular, and more and more obsolete every day.

  • Report this Comment On March 27, 2013, at 8:36 AM, neocolonialist wrote:

    >For years, it was assumed that America's insatiable appetite for oil would spike prices and balloon the trade deficit

    Who assumed that? The same liberal nitwits that have been telling me since I was 8 years old that "scientists already know roughly how much oil exists and we only have 8-10 years of oil supply left at current usage levels". I mean, "we can't make more oil". If I had 1$ for every time nonsense like that was forced down my throat, I wouldn't need to subscribe here.

    And guess what calamity would befall us if oil truly ran dry? Hmmm, I am thinking that between the real scientists and those greedy businessmen out there that actually work and like to make profit, we might just, I dunno, come up with an alternate solution? I know its crazy, cuz the liberal world view is that only innovation in wind energy progresses, all others stay the same or get worse whatever "destroys the planet" faster.

    The arrogance is what really gets me. They are arrogant enough to think that "science", or their version of it has all of the answers. Nevermind that "science" can't explain what over 90% of the universe is made up of, or what's in over 95% of the oceans, or what over 85% of all species look like, or what the weather is going to look like in two weeks. Yep, we got all the answers. I love science and technology, but I don't love what has happened to science. Its medieval.

    Not a bad article btw. Now if we could just get or idiot politicians out of the way of things like Canadian pipelines and new oil rig permits, we might actually be able to stop funding our enemies someday.

    Bill M.

  • Report this Comment On March 27, 2013, at 9:46 AM, sevenheart wrote:

    Windmills and solar panels ignore one thing- not all oil is used to generate electricity. More than 50% of our oil consumption is for a chemical feedstock. Build all the windmills and photovoltaic plants you want, it will not reduce the demand for oil. In fact windmills need oil for lubrication.

    Back to the main purpose of this article- energy companies as an investment- do your research carefully and then invest in the most boring companies you find- they are the ones that will perform best over the coming years. If you had invested in Conoco Philips before the split last year, you would have enjoyed a tremendous gain, Phillips- the boring refinery side has risen steadily for great returns.

    It's too bad every forum like this becomes a soapbox for advocacy of politically motivated "science".

  • Report this Comment On March 27, 2013, at 1:17 PM, mikecart1 wrote:

    It could also be due to gas being 10% enthanol around the country now.

  • Report this Comment On March 27, 2013, at 7:28 PM, Darwood11 wrote:

    Factkneader, that talk was to the point and so I also included some additional distinctions:

    1. Junk Science and Entertainment vs Science.

    2. Climate Change vs "Global Warming".

    3. Facts versus assertions versus opinions.

    4. Manipulation and fear mongering versus rational discourse.

    I didn't use those precise words, but I did provide examples. They got it about "junk science" and also understood what "science fiction" and "fantasy" are.

    Of course no discussion would be complete without discussing propaganda and scare tactics. For example "the world will likely be a very different and much more tumultuous place". Perhaps it will, and perhaps it won't. If the Yellowstone caldera blows (and why shouldn't it) then things will be much, much worse, but for a different reason. Ditto if a mountain sized chunk of rock hits the planet. These are all real possibilities. So are some of the rosier projections.

    I think critical thinking skills are more useful than worrying about some of these things. A lot of people prospered during and after 2008-9, and they were normal, hardworking people who used such ordinary skills and bought stocks and other assets while the market was tanking.

    This is an investment website and I think there are some lessons to be learned, and we can benefit from those lessons if we have good teachers or mentors and if we are willing to learn.

    Will there be wars in the future, recessions and other difficulties? Yes. Will the world end as we know it in 20, 30 or 50 years? No one knows. Some insist they do know and some insist it will. I'm not looking for a new crutch and so I'll continue to use my head.

  • Report this Comment On March 28, 2013, at 11:09 AM, 1pOwedyank wrote:

    It's not that liberals are stupid, it's that they know so much that isn't true.

    I'm 52. I found a report I did on the Alaskan pipeline when I was in 8th grade the other day. The conclusions I came to from reading various articles and other sources was so wrong, it really made me pause, and think about, "what else I learned wrong".

  • Report this Comment On March 29, 2013, at 1:57 PM, drborst wrote:

    I'm curious, Do the Saudi's use Fracking? If not, what happens when they start?

    DRB

  • Report this Comment On March 29, 2013, at 3:03 PM, swiver wrote:

    Are there frac jobs in Saudi? Are there oilfield service companies there? Of course there are.

  • Report this Comment On March 29, 2013, at 5:58 PM, Darwood11 wrote:

    I was in Saudi Arabia (SA) for business purposes a few years ago; flew in and out as necessary but my longest stint was about 60 days and the shortest 5. I spent time at the one of the largest gas plants (LNG) in the world as well as in a major refinery.

    Will they use Fracking? I'm not a geologist; I'm a professional problem solver. I assume that they will use something like that in the future when the yield from some of their wells begins to taper below an acceptable level. Those facilities cost many $billions each. It takes a lot of oil to keep them running and no one will want to fall below a minimum operational threshold earlier than necessary.

    Not only that, but those plants also have industrial boilers which produce the steam to run the turbines and generators in the electrical generating plants, which are located adjacent to these large refineries.

    SA has a goal to double electrical generating capacity by 2020.

    For the Saudi's, it will be vitally important to keep those refineries and associated steam generating plants running for many decades.

  • Report this Comment On March 31, 2013, at 4:40 PM, PALH wrote:

    Rather than ``play along,'' I hope the environmentalists and progressive political leadership in my state instead choose to push for solar and other alternative energy solutions. Predictably, alternative energy is dismissed by the petrochemical apologists as a ``drop in the bucket,'' a deliberately misleading argument considering that the near entirety of national political will is bent toward supporting and coddling the fossil-fuel industry at the expense of investment in renewable energy. The ``drop in the bucket'' is the amount of money allocated to developing alternate energy resources.

  • Report this Comment On April 01, 2013, at 1:20 PM, interdependent wrote:

    From our leading experts on Climate Change who accurately predicted the changes we observed for the last 30 years.

    http://arxiv.org/ftp/arxiv/papers/1110/1110.1365.pdf

    This research paper was submitted to the courts on behalf of young people who are suing for a plan to protect themselves and nature from irreversible catastrophic climate change. If you have kids or grandkids, let's hope our nation's judges can still understand science.

    If you invest in fossil fuels to make money for your retirement or your grandkids' inheritance, please stop. Join the 350.org divestment campaign now.

    Burning fossil fuels is on a par with slavery as a moral issue, as we are selling our kids future to make a profit, and they have no recourse. We can only stop ourselves. Stand up for them.

    14,000 peer-reviewed scientific papers confirming global warming are not "liberal", they are "scientific".

    If you have an agenda - to make lots of money - and it harms someone else, is it easier to resist the truth rather than admit you made a big mistake?

    #1, Check your carbon footprint.

    If you live in the USA, we use on average 10 times the fair amount if we want to get to carbon neutral by 2050.

    #2, Make big changes.

    Learn to live on less. It's enjoyable, and as you can see from Morgan's article, you'll save loads of money.

    Look at your transportation, home heating, food, and consumer habits. That's where most of our carbon waste comes from.

    #3, Speak up.

    If you care about your kids, or any future where we are not the one generation in history who knew what we were doing to future generations, and did it anyway, then please speak up. I've been quietly working on my footprint, living by example, and as you can see from these comments, in the year 2013, it is still drastically insufficient.

    #4 Learn to see propaganda for what it is.

    When you read a scientific paper, you are reading something very different from a quarterly report. The fossil fuel companies are the richest corporations in the history of money. Would you believe them, or their paid employees, before you would believe 99% of the world's scientists?

  • Report this Comment On April 01, 2013, at 3:04 PM, borneofan wrote:

    ugh. Oil is not slavery. Perhaps social security, medicare and medicaid are theft, and just cause for kids to sue parents, but not oil. Global warming is largely behind us, a spent consequence for long past industrialization. I'd like to put a carbon boot on and stomp paper volume measurements for government science. As though ideas compete on sheer weight alone. In a publish/perish environment, more is not better. It only took one Einstein to dump all of Newtonian mechanics into the dustbin.

    A modest volcano can put forth all the CO2 ever created by humans, and do it in less than a year.

    Work on your footprint even more quietly and cease the propaganda.

    At least we all agree on the economic value of efficiency improvements, distributed generation and cogeneration. The rest is blather.

  • Report this Comment On April 02, 2013, at 12:16 AM, VictorErimita wrote:

    As we see from some of the fervid comments here, the AGW legend lives on. Enough people have been so effectively indoctrinated to believe the fake scientific "consensus" narrative, and are too lazy, religiously devoted or tribally loyal to educate themselves about the failure of the AGW models, to constitute an enabling voting block for the crony capitalist "green energy" scammers and eco fascists to kill this would-be boom in the cradle. I don't see any decline in the number of useful idiots in the Regressive army. Makes me less than excited about the prospects of this boom ever happening.

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