ISTANBUL—New energy trends are bolstering the United States and China, giving their industries a sharp competitive edge over Europe’s and Japan’s in the next quarter-century, according to a major new study by the International Energy Agency. However, IEA’s chief economist, Fatih Birol, suggested that Europe can arrest its long competitive slide if it reverses a thus-far halting approach to the development of shale gas and oil.
Birol, addressing a conference organized by the Atlantic Council in Istanbul, spoke today as part of a week-long rollout of the IEA’s much-watched annual energy outlook. On Nov. 12, the IEA began the launch by forecasting that the US will overtake Saudi Arabia as the world’s largest oil producer in 2017 and hold that position through the early 2020s before slipping back to second or third place. The US is already the world’s largest natural gas producer.
The US leap in hydrocarbon production stems from the surprising success of hydraulic fracturing, or fracking, of shale gas and oil in places like North Dakota, Ohio, Pennsylvania, and Texas. The story has been different in Europe, which also possesses potentially rich shale formations but has experienced environmental resistance to developing it. France and Germany have banned fracking, and Germany is considering doing so. Permitting has been slow in some other European countries, said Chevron’s Ian MacDonald. Europe, as with some US communities and states, has adopted the cautious approach because of the potential for poisoned drinking water and other concerns.
Still, Birol said Europeans ought to at least allow exploration. “You are banning it without even knowing whether there is shale gas or not,” he said. “Every day that Europe takes this position is a disadvantage vis-à-vis the United States. I won’t be surprised if some industries in Europe look to relocate elsewhere.”
The surge of US shale gas production has cut down natural gas prices in the United States, Birol noted. Current US natural gas prices are about $3.81 per 1,000 cubic feet, compared with about $11 for the same volume in Europe and $17-$18 in Asia. By 2035, Birol forecast, the price of electricity will be about 14 cents a kilowatt in the US, 19 cents in Europe, and 24 cents in Japan. In China, the price will be about 5 cents. When put together, such prices make it cheaper to operate factories and plants in the US and China.
“The foundations of the global energy system are shifting,” Birol said. “It will affect everybody.”
Even though the IEA outlook aligns with numerous such recent reports, it made a big splash with its headline forecast about Saudi Arabia temporarily losing its paramount slot atop global oil production. Afterward, some analysts noted that the forecast of the US producing 11.1 million barrels of oil a day is speculative, relying on the cooperation of regulation, public opinion, and especially prices and costs.
In a Nov. 15 note to clients, Deutsche Bank’s Paul Sankey argued that the law of supply and demand will prevent the US from ever surpassing Saudi production. Sankey said that domestic American politics will prevent the US producers from being able to export their oil and will thus isolate the surging crude oil production largely within the nation’s borders. Currently, the federal government must approve oil and gas exports. When this supply overwhelms American demand, the price of US-benchmark WTI crude will drop, making further production uneconomical and effectively capping US production before it ever reaches Saudi levels. “The growth cannot be sustained,” Sankey said.
Paul Horsnell of Barclays told me that the IEA’s US forecast may materialize but that the production increase won’t have a serious global impact because output is shrinking elsewhere. Saudi Arabia gets its reputation for more than just high production: it also keeps a cushion of unused production capacity that can be brought on line in a pinch. The Saudis produce around 10 million barrels of oil a day but have the capacity to produce 12.5 million barrels. The existence of this 2.5 million-barrel-a-day cushion, known as spare capacity, helps to stabilize global oil prices.
Some analysts forecast that the US in fact will surpass the IEA figure. Frank Verrastro of the Center on Strategic and International Studies, for instance, says the US will probably produce 12 to 13 million barrels a day of oil by 2020. But Horsnell said all of that will be for sale; US-based producers probably won’t keep any spare capacity, so the US won’t play the same vital role as the Saudis. “The idea of a new Saudi Arabia seems just a cheap headline,” he said.