A Top Analyst: North America Heading to Energy Independence

Is North America on the verge of energy independence?  At least one analyst thinks so.

Ed Morse, a managing director of Citigroup Global Markets, said last week that by the end of this decade the US and Canada will have a surplus of oil, leaving it with “no room for imports.”   But the longer-term picture is far less certain, as extraction moves from conventional wells to newer sources, such as deepwater fields and shale-based oil.

Morse contended that oil prices rose over the last several years because of a lack of supply, brought on by the oil industry’s insufficient investment over the last decade.   Now, he predicted, with the development of new technologies, such as fracking, a cyclical phase of higher supply and lower prices has begun.

Most of the other speakers at the Oil Supply and Demand Symposium, held in New York on June 19, viewed the decline in oil prices – with gasoline now below $4.00 per gallon – as temporary.  

Mark Lewis, a managing director in commodities research at Deutsche Bank, was among those with a less sanguine view than Morse’s of the prospects for cheap oil.   Oil consumption in OPEC countries is rising faster, on a percentage basis, than anywhere else in the world, Lewis noted.  Those countries need oil prices of $90 to $100 per barrel to balance their internal budgets, providing an effective floor going forward that is already above the current Brent price of approximately $91 per barrel.

The fundamental question is clear:  Are we at the end of the era of cheap oil, or will oil prices vary cyclically, as supply and demand shift in response to varying market conditions? 

Economic growth is constrained by energy availability, so answering this question is critical.  Let’s look at the analyses presented at last week’s conference.

A glut of crude

US production is now at 6,000,000 barrels per day, and Canadian production adds another 3,000,000 barrels daily, according to Morse, who said those numbers could increase by 10%.  He also expects “positive surprises from Mexico” in terms of increased production.  Global crude oil production (not including natural-gas liquids, unconventional oil, biofuels or refinery gains) is approximately 75 million barrels per day.

By 2020, Morse expects a surplus of oil in the combined US and Canadian market, the result of significant capital expenditures by the oil industry over the last decade.