Oil Independence? Yes - "Cheap" Oil? - No

I have written about this before because I feel the headlines are misleading for those in energy intensive industries such as transportation.  The headlines talk about energy independence and energy dominance and the underlying assumption by most is this will translate into low cost oil.  This could not be further from the case.

We will continue to have high priced oil and the IEA in the same report where they said the US will be the dominant producer of oil also said you can expect oil priced at $125 per barrel (inflation Adjusted).  Oil is a global  commodity and therefore will settle on global prices.  The Wall Street Journal in an article entitled "Don't Expect Lower Oil Prices Even As US Output Surges" quotes the report by saying:

"But oil prices, the IEA said, will continue to rise, hitting $125 per barrel in inflation-adjusted terms — more than $215 per barrel in nominal terms — by 2035. U.S. consumers, the agency makes clear, won’t be shielded from those price increases, even if the country doesn’t import a drop of foreign oil."

The report goes on to say:

"Oil is a global commodity. What matters for prices is total supply and total demand — not where the oil is produced or consumed. That means that even if the U.S. relied only on domestically produced oil, prices would still be dictated by global market forces."

 Oil prices are based on global supply and demand and oil is very easily exported.  As soon as there is a big enough price differential where traders can make money in arbitrage they will export the oil. The graph below shows the predictions by the IEA:

So, the conclusion is clear... The US will be a large oil producer AND you will still be paying $3.00 - $4.00 in adjusted dollars per gallon.  

U.S. Overtakes Saudi Arabia in Oil Production by 2030 - IEA

This is a fascinating statement and it shows how disruptive technology (i.e, the ability to extract tight oil and shale oil / gas) will really turn the world energy markets on their head.  The International Energy Agency (IEA) has two reports out.  The first (as reported by Bloomberg) describes how the US will overtake Saudi Arabia in oil production.  Some interesting statistics:

• Last Month Saudi Arabia pumped 9.8 million barrels per day; The US 6.7 million - very close. 
• US production this year will be highest since 1991.
• 83% of the US domestic oil needs were met with domestic oil supplies in the first 6 months of 2012. 

The second report (again as reported by Bloomberg) tells us by 2030 natural gas will be the predominant source of energy in the United States as it will be plentiful and cheap.  Both of these are incredible developments given just a few years ago people were talking about "Peak Oil".

I will add a bit of commentary on sustainable practices.  I hope we as a country are wise enough to see these developments as incredible luck which gives us time to move to a more sustainable way to power our economy.  If we use this as a way to get "cheap energy": which then makes the business case for sustainable energy not economically viable then we will have squandered a huge opportunity.  

Also, as I have stated before, do not confuse "energy independence" with "cheap oil".  The oil prices will almost always be at world levels because if they are not then the energy will simply be exported rather than consumed in the US. 

The impact on transportation will be clear:

• Oil supplies abundant
• Oil prices at world levels (i.e., no "cheap oil")
• Movement to natural gas will continue.