The U.S. Oil Boom

The U.S. appears to be in a significantly better position today than it was just a few years ago.

By + More

If the Dow Jones Industrial Average, the NASDAQ, and the Standard & Poors 500 Index tell us anything, it's that the U.S. economy, despite everything you hear on your local news broadcasts, is recovering. If you're uncertain about that, just look at your 401(k) and compare that to where you were four or five years ago. Maybe the improvement comes in spite of government actions or policies ... we'll leave that debate up to you.

Ford Motor Co. announced Dec. 12 that it plans to hire about 5,000 employees in the U.S. in 2014 and that's to implement a plan to launch 16 new vehicles in North America, including the 2015 Mustang and F-Series, and, seven new vehicles in the rest of the world.

Four days later General Motors said it was spending $1.3 billion to upgrade five plants and produce components including a new-generation V-6 engine and a 10-speed transmission. The plants getting the upgrades are located in Detroit, Flint and Romulus, Mich.; Toledo, Ohio and Bedford, Ind. and GM says the spending also will create or retain about 1,000 jobs.

It sure looks like they're making these moves because they sense that things are getting better. There are many positive developments and North America's energy boom may be the greatest of them all. It's an economic catalyst. That's not hype; that's fact. In November the International Energy Agency said that by 2015 the U.S. will surpass Saudi Arabia and Russia as the world's biggest oil producer and is on track to become energy self-sufficient in two decades. It said the U.S. is moving towards meeting all of its energy needs from domestic resources in 2035.

[See a collection of political cartoons on energy policy.]

Yes, there's lower cost crude oil coming from the Bakken shale region in North Dakota; lots of it. The Energy Information Administration says the Bakken crude oil production now exceeds 1 million barrels per day. And it's flowing from the Permian Basin in Texas and, eventually, the Monterey shale region in California. The Monterey shale in Central and Southern California alone covers two-thirds of the U.S. total estimated shale oil reserves. Its untapped crude oil deposits are estimated at 15.4 billion barrels, more than four times the estimate volume of the Bakken Shale of North Dakota.

Of course, all of this crude needs to be able to reach refineries. And we see now that pipeline and rail infrastructure is trying to catch up. Midstream investment in such infrastructure in 2012 (the most recent year available) reached $26 billion.

Sometimes available logistics cause bottlenecks. And refineries often have operational challenges. Of course, we know safety must play a central role in infrastructure development and we saw great disruption following the derailment in Quebec of the Montreal, Maine & Atlantic Railway train that was hauling Bakken crude to the East Coast.

While greater safety measures are being implemented, the growth of rail usage is undeniable. We mentioned earlier in the year that the BNSF Railroad hauled 1.3 million barrels of oil in 2008 and that number has grown to 100 million barrels in 2012, with heavy crude. Understandably, many refineries want access to the Canadian and Bakken (heavy sour) crude that often sells at a significant discount to Brent and West Texas Intermediate.

[See a collection of political cartoons on gas prices.]

Concerning OPEC, we see that the increase in domestic production and increase in crude from Canada, is reducing its clout. Potentially troubling events in the Middle East, which in the past might have triggered sharp spikes, no longer have the same impact on global crude oil prices – and, indirectly, U.S. gasoline prices – that they once did.

Clearly, 2013 closes with a mixed bag of factors that will shape retail gas prices in 2014. Of course, we would be remiss if we didn't acknowledge that taxes took a bigger bite from our gasoline purchases. In 2013, 19 states plus Washington D.C. increased their tax on gasoline and/or diesel and there's an initiative coming from Oregon to raise the federal gas tax from the current level of 18.4 cents per gallon to 33.4 cents per gallon.

While it's true that economic and geopolitical events, weather, and everyday operational issues all have the potential to jolt gas prices, the U.S. appears to be in a significantly better position today than it was just a few years ago. We have greater refining capacity and unprecedented supply. But, we'll also address logistics and transportation challenges in getting both crude and finished gasoline to markets.

It's from this context that we should look ahead with optimism and temperance.

Gregg Laskoski is a senior petroleum analyst with