Shale oil is a competitive threat

American shale oil production is growing quickly. It’s set to make the US a net oil exporter again. This will reduce or eliminate Americans’ need for Canadian oil. Shale oil can also put a lid on prices and make costly Canadian oil uneconomic.

Shale_OilIn our May 26 issue, we wrote: “American shale oil producers can ramp up and ramp down their production very quickly, in response to changing prices. As technology continues to improve, their break-even points (the oil price at which the shale producers become profitable) is likely to keep on falling. The US now has much less need for oil from the Middle East.” The US will also have much less need of Western Canadian oil. Particularly costly oil.

The change was more profound that we thought at that time. According to the International Energy Agency (IEA), between 2010 and 2025, US oil production will grow faster than in any other country in history, including Saudi Arabia and Russia.

Dr. Fatih Birol, the executive director of the IEA, said: “The US is becoming an undisputed global leader in oil and gas production”. This mostly reflects technological breakthroughs in drilling and fracking. This has brought forth enormous amounts of oil and gas, formerly trapped in shale rock.

The US is set to become a net oil exporter

The IEA expects the US to replace Qatar as the world’s largest exporter of liquefied natural gas by the mid 2020s. It also expects the US to become a net oil exporter around 2027. The last time that the US exported more oil than it imported was in 1953.

The IEA credits former president Barack Obama for requiring vehicles to become more fuel efficient. Otherwise, the US would have failed to become a net oil exporter again. The IEA predicts that by 2040 global energy needs will have risen by 30 per cent. It sees no peak oil demand in 2040—despite electric cars and renewable energy. Dr. Birol said: “It is too early in my view to write the obituary of oil. Oil demand will still grow because of trucks, ships, aviation and petrochemicals.”

Asian demand for energy continues to grow. The IEA expects China to overtake the US as the largest oil consumer in the world. Just keep in mind that similar predictions about Japan in the early 1990s never came to pass. The IEA also expects that 70 per cent of liquefied natural gas exports will go to Asia.

Even if demand for oil grows, we think the very long-term outlook for some producers in Western Canada has darkened. First, if the US becomes a net oil exporter, that country’s demand for Canadian oil will likely diminish and then disappear.

Second, shale oil production is fairly cheap. This will keep a lid on prices. It also makes high-cost oil uneconomic. It pays for existing oil sands producers to keep going as long as the price of oil exceeds their cash costs. But it doesn’t pay to build new oil sands production capacity. Keep the drawbacks in mind.

This is an edited version of an article that was originally published for subscribers in the November 24, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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