Oil: America’s Comeback

Forget all the noise and protests about coal seam gas and fracking in the US, there's a much more important development at work, one that could change the world as we know it.

The fracking will lift output of gas, which in turn, will push the US dollar higher, putting enormous pressure on US industry and relieving pressure on Australia, China and other economies.

The greenback's ascent will be slow (but they will be cheering in Europe) as America's oil imports fall as gas production rises.

In fact oil imports could halve between now and 2035, with the amount spent each year falling by hundreds of billions of dollars a year.

That in turn will cut the supply of greenbacks to the world, adding to funding pressures for regions short of the currency, such as Europe.

America is slowly but surely increasing its energy (chiefly oil) self-sufficiency because of the rising level of production of gas from new sources such as shale, tight gas from existing fields, blended ethanol and some renewable sources.

And the fracking production of gas to boost US reserves to around the 100 year level (now 8 years, but that's up from 4 years thanks to the surge in drilling and production).

So those fears about the strength of the Australian dollar might be misplaced if you think the currency will be high for a long time.

The changes will have a slow but startling impact on world oil and gas prices, commodities generally, and on the value of the US dollar and other currencies.

In fact in an early edition of its annual energy outlook, the EIA says the US is expecting a dramatic change in energy self-sufficiency with oil imports halving over the next 20-odd years.

The Agency says it sees US dependence on imported petroleum liquids declining "primarily as a result of growth in domestic oil production by more than 1 million barrels per day by 2020; an increase in biofuels use to more than 1 million barrels per day crude oil equivalent by 2024; and modest growth in transportation sector demand through 2035.

"Net petroleum imports as a share of total U.S. liquid fuels consumed drop from 49 percent in 2010 to 36 percent in 2035.

"Proposed fuel economy standards covering vehicle model years 2017 through 2025 that are not included in the Reference case would further reduce projected liquids use and the need for liquids imports.

"Imported liquid fuels as a share of total U.S. liquid fuel use reached 60 percent in 2005 and 2006 before falling to 50 percent in 2010."

The Agency forecasts that the decline will continue, with the level of imports dropping to 36% by 2035, lower than the 42% forecast in last year's outlook.

The EIA said that by 2035, the "net import share of total U.S. energy consumption in 2035 is 13 percent, compared with 22 percent in 2010. (The share was 29 percent in 2007, but it dropped considerably during the recession)".

That will be an enormous change in the US: at 13%, its virtual self-sufficiency for the US and with much of the imports coming from Canada, Mexico and the Western hemisphere it has considerable strategic interest as well.

America won't be as dependent on Middle Eastern crude, a point Israel and Saudi Arabia had better heed, along with the various emirates in the Gulf.

Instead, China and Europe will be major buyers, plus other economies in Asia such as Japan, Korea and India.

Australia will be the largest energy exporter in the major industrialised economies, shipping tens of millions of tonnes of LNG to China, Japan and other Asian economies, and huge amounts of coal, uranium and some oil.

The LNG will come from a mixture of natural gas, coal seam methane and some shale gas, although much of that (from around the Cooper Basin in South Australia, the Northern Territory and Queensland) will be used to keep the existing basin fields supplying gas to much of the east coast.

According to a survey conducted last year by the EIA, Australia has the 6th largest potential reserves in the world of so-called unconventional gas, the same stuff which is changing the energy make up of America.

In the US, there's not only the dramatic impact of the expansion in gas production, but much of it so-called 'wet' gas from shale and tight rock, which contains more liquids than 'dry' gas.

BHP Billiton has said it will push ahead with boosting its liquids production from its growing exploration areas in the US Midwest, rather than just pumping gas (where prices have slumped alarmingly in the past two years, and will remain low for years to come).

"Much of the growth in natural gas production is a result of the application of recent technological advances and continued drilling in shale plays with high concentrations of natural gas liquids and crude oil, which have a higher value in energy equivalent terms than dry natural gas," the EIA said.

Shale gas production is forecast to increase from 5.0 trillion cubic feet in 2010 (23% of total US dry gas production) to 13.6 trillion cubic feet in 2035 (or 49% of total dry gas production).

This surge will change power generation, home and industrial supplies and make more oil available for export from the south and see coal production reduced.

The natural gas share of electric power generation will increase from 24% in 2010 to 27% in 2035, and the renewables share is forecast to go from 10% to 16% over the same period.

"Over the next 25 years, the projected coal share of overall electricity generation falls to 39 percent, well below the 49-percent share seen as recently as 2007, because of slow growth in electricity demand, continued competition from natural gas and renewable plants, and the need to comply with new environmental regulations," the EIA said.

"Domestic crude oil production has increased over the past few years, reversing a decline that began in 1986.

"U.S. crude oil production increased from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010.

"Over the next 10 years, continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico, pushes domestic crude oil production in the Reference case to 6.7 million barrels per day in 2020, a level not seen since 1994.

"Even with a projected decline after 2020, U.S. crude oil production remains above 6.1 million barrels per day through 2035."

And the US will become a modest competitor to Australia and the Middle East in LNG.

"The United States is projected to become a net exporter of liquefied natural gas (LNG) in 2016, a net pipeline exporter in 2025, and an overall net exporter of natural gas in 2021.

"The outlook reflects increased use of LNG in markets outside of North America, strong domestic natural gas production, reduced pipeline imports and increased pipeline exports, and relatively low natural gas prices in the United States compared to other global markets," the EIA said.

But as dramatic as this is, there's an even more important impact on the value of the US dollar.

The US current account deficit is dominated by oil imports valued at around $US300 billion a year.

The conventional wisdom is that as the US economy recovers (as it is now seeming to do), the current account deficits will rise and foreign central banks will start accumulating more greenbacks.

But if oil imports are falling, the current account deficits won't rise by nearly as forecast, in fact they could remain steady or contract slightly as the economy grows, meaning there's actually a fall in the amount of currency being pumped into the rest of the world.

That in turn will drive up the value of the US dollar, which could then help drive down the prices of oil and other commodities (gold and silver bugs won't be amused).

And, as the value of the greenback continues to remain high, oil prices won't rise as much as many projections forecast, meaning the US current account deficit could shrink even further as the value of the falling amount of oil declines.

Look out for the appearance of current account surpluses in the US (last seen in the 1990s).

Watch also for oil and other commodities to be priced in a basket of currencies, or even in the Chinese currency if it is floated.

Weak or hard to price commodity prices means more pressure on the Australian economy and the dollar in coming years and a tougher time for governments and regulators.

But it could help relieve pressures here from the high dollar and the resources boom and boost national income again simply via the impact of the lower value of the dollar (as it did in late 2008 when the crash was happening and our export income soared as the dollar fell).

According to figures released late last month by the federal government's Bureau of Resources Economics, Australia is one of the world's top ten energy players.

The energy industry accounts for about 5% of total industry value added in 2009-10, or around $68.2 billion.

Australia is the world's ninth largest energy producer, accounting for around 2.5% of world energy production and 5% of world energy exports.

In 2009-10, net energy exports accounted for 68% of domestic energy production, while domestic consumption accounted for the remaining 32%.

The Bureau said that in 2009-10, coal accounted for 37% of Australia's total primary energy supply, followed by oil (35%), gas (23%) and renewable energy sources (5%).

Earnings from energy exports were around $70 billion in 2010-11, accounting for 33% of the total value of Australia's commodity exports.

Coal is Australia's largest energy export earner, followed by crude oil and liquefied natural gas (LNG).

Looking at that, the rise in US gas production, energy self-sufficiency and a rise in the value of the greenback, shouldn't have too dramatic an impact on the Australian economy.

The only proviso is if it starts undermining world LNG prices, forcing some of those big projects to accept lower than contract prices.

In the US, there are significant environmental concerns about fracking and other methods (coal seam gas production is another) to be confronted and dealt with.

But they shouldn't be a barrier to this significant change happening at roughly the pace the US and other authorities now expect (certainly the International Energy Agency thinks it will occur).

The IEA sees gas and renewables satisfying an increasing share of world energy demand over the next 20 25 years, with much of that coming in the US, particularly for the US.

Higher levels of energy self-sufficiency are now a powerful urge in the US, after decades of being dependent on oil from the Middle East and the likes of Venezuela.

It is seen as helping revitalise an economy and rebuild American pride.

It might even give the US the confidence to start bringing its huge budget deficit and debt under control.