The Situation
A few years ago, many (if not most) energy analysts expected that U.S. oil production would continue its secular decline as older oil fields played out and as finding and developing new production capacity became increasingly difficult and expensive. At the same time, long-run projections showed U.S. oil consumption expanding over time as both the economy and population grew. Both projections have been stood on their head; the trends in production and consumption over the last five years dramatically illustrate how quickly the U.S. oil situation has reversed course.

Oil: 2007 vs. 2012
Total petroleum consumption in the first quarter of 2012 was 13.6 percent below its level in the first quarter of 2007. Gasoline and diesel fuel consumption also fell over this period (Table 1). The recession clearly impacted consumption, but constant dollar GDP in the first quarter of 2012 was 3.4 percent above its level five years earlier. The intensity of petroleum consumption, as measured by the ratio of the number of barrels of oil consumed to GDP, fell by 16.4 percent over this timespan.

The other factor affecting oil consumption was, of course, the price of oil, which (measured in constant dollars) increased by 84.6 percent over this period. Had the price of oil instead remained constant, consumption likely would have increased. The rise in the price of oil and petroleum products has induced a move to products requiring petroleum (e.g., automobiles, trucks, and aircraft) that are more energy efficient. The higher price of oil and the expectations that the price will continue to rise (albeit at a slower rate than seen over the past year) have led to downward revisions of the expected long-term growth rates of oil and petroleum products.

Table 1 – Oil Consumption, GDP, and the Price of Oil, 2007 vs. 2012

Source(s): Energy Information Administration, Bureau of Economic Analysis, and MAPI

The rise in the price of oil, along with the development of hydraulic fracturing and horizontal drilling, has led to a reversal in what seemed to be an inevitable decline in U.S. oil production. In just five years, production has increased by close to 1 million barrels per day, or by 19.1 percent. While production in some states (such as California) declined, it rose in other states and is expected to continue rising.

As an approximation, the large expansion of production in North Dakota and Texas accounts for the net increase in U.S. oil production between January 2007 and January 2012 (Table 2). Activity in the Bakken shale formation in North Dakota is ongoing and the use of hydraulic fracturing in Texas is rapidly expanding. For example, new well starts in the Eagle Ford shale formation in Texas increased by 111 percent between the first quarter of 2011 and the first quarter of 2012.

Table 2 – Oil Production, U.S. and Selected States
(Thousands b/d)

Source(s): Energy Information Administration

Long-Term Outlooks for Oil
The Energy Information Administration produces an annual long-term U.S. energy outlook that provides detailed forecasts of energy consumption and production for the next 20 to 25 years. A comparison of the current (2012) outlook with forecasts published just a few years ago further illustrates how dramatically the U.S. oil situation has changed (Table 3).

In the 2004 Annual Energy Outlook, petroleum consumption was projected to grow at an annual rate of 1.5 percent between 2010 and 2025, whereas the 2012 outlook projected it to decline by 0.04 percent per year. The difference in the long-term forecasts is rather astounding; the 2012 report projected petroleum consumption to be 9.4 mm b/d lower in 2025 than what was projected in the 2004 outlook—a decline of 33 percent.

From 2010 through 2035, consumption is expected to grow by just 0.1 percent per year. The oil consumption figure in the 2012 outlook includes ethanol, the use of which will continue rising. If the oil consumption forecast excluded the ethanol that is blended with gasoline, oil consumption through 2035 would show as declining slightly.

The production forecast has also changed markedly. Instead of declining at an annual average rate of 0.9 percent between 2010 and 2025 as projected in the 2004 Annual Energy Outlook, it is now expected to grow by 1.2 percent through 2025 and at an annual rate of 0.5 percent through 2035. The difference in these two production forecasts is large, amounting to 1.9 million barrels per day in 2025.

Table 3 – Long-Term Forecasts of Oil Consumption and Production
(mm b/d per year)

Source(s): Energy Information Administration and MAPI

Significance of Increasing Oil Production
The current U.S. energy picture is much brighter than it was just five years ago, when oil was forecast to steadily decline. The turnaround is a real positive for the U.S. economy and the manufacturing sector. Aside from reducing the pressure on oil prices in a world in which total consumption is expected to grow as the economies of China and India expand, increased U.S. production is contributing to a reduction in our trade deficit, creating jobs, and adding to energy security.

Increased energy development has direct links to the manufacturing sector in that it requires products such as steel pipe, pumps, excavation equipment and trucks, etc. While economic and population growth may eventually lead to renewed escalation of U.S. petroleum consumption, recent trends suggest that the growth rate will be much lower than previously expected because of increased energy efficiency and conservation.

Also significant are the implications of increased U.S. oil production for energy policy. Policies predicated on forecasts in which oil production is anticipated to decline steadily over time are likely to be quite different from those recognizing that oil production has the potential to increase significantly. This potential is further bolstered by estimates of U.S. oil resources; the U.S. Geological Survey predicts that the nation has more than 18 percent of the world's conventional oil resources.^[1] Conventional resources do not include oil (and natural gas) resources in shale formations; estimates of the latter continue to grow.

Footnotes

^[1] U.S. Department of the Interior, www.doi.gov/news/pressreleases/USGS-Releases-Global-Estimate-for-Undiscovered-Technically-Recoverable-Conventional-Oil-and-Gas-Resources.cfm. The U.S. share of the world's proved reserves is 2 percent. Proved reserves are those that have been determined by actual drilling. Estimates of oil resources measure what is thought to be recoverable using today's technology. These estimates have not been confirmed by drilling.