Last year was a watershed in global energy markets, with the U.S. estimated to have overtaken Russia and Saudi Arabia to become the world’s largest crude oil producer for the first time in 45 years.
U.S. crude oil output has more than doubled in the past decade, led by shale oil, and exports to Asian nations are also rising. Asia has up to now relied heavily on the Middle East for its oil, but growing imports from the U.S. could profoundly alter energy geopolitics.
According to estimates by the U.S. Energy Information Administration and the oil industry, U.S. crude oil production averaged around 10.9 million barrels a day in 2018, up about 20% from a year earlier.
The U.S. was the world’s third-largest crude oil producer in 2017, but overtook top-ranked Russia and No. 2 Saudi Arabia to become the world’s biggest producer by September 2018, drastically changing the competitive landscape.
Shale oil has become commercially viable, even at prices of $50 or less per barrel, as innovation has lowered production costs.
In 2015, the U.S. lifted a long-standing ban on crude exports imposed in the wake of the first oil crisis in the early 1970s. Since the ban was scrapped, its exports have grown sharply. As of November last year, the U.S. was the fourth-largest exporter of the commodity. Analyst Daniel Yergin predicts the U.S. will become a net exporter by the early 2020s.
U.S. crude is also having a bigger impact on Asia, which is now the biggest consumer globally. U.S. crude grades popular with Asian buyers include light oils such as West Texas Intermediate, Midland and Eagle Ford.
South Korea offers a case study on the effect of U.S. crude oil exports in the region. Shipments to South Korea totaled 457,000 barrels per day in November last year, an eightfold increase from the average for 2017. The surge in buying reflects South Korea’s effort to cut its trade surplus with the U.S. by expanding energy imports.
Indian Foreign Minister Shri Vijay Gokhale stressed the importance of U.S. crude in November 2018, after meeting with Vice President Mike Pence. “We have begun importing oil and gas from United States. It is expected to be valued [at] about $4 billion this year and we expressed our readiness to import more oil and more gas from the United States as a way of expanding our trade,” Gokhale said.
U.S. oil exports to Asia are set to rise in 2019 as sellers cut prices following sharp drops in shipping rates and an expected decline in demand in the U.S., according to oil traders in Japan.
According to a trader at a major Japanese trading house, there is strong downward pressure on spot prices for grades such as Abu Dhabi’s benchmark Murban crude, as U.S. oil companies have begun pricing aggressively.
Vietnam, an Asian producer, plans to increase imports of cheaper U.S. oil. The state-owned Dung Quat Refinery is considering purchasing up to 1 million barrels of WTI, according to S&P Global Platts, a U.S. commodities information provider.
In November last year, the U.S. granted exemptions to eight countries, including Japan and South Korea, allowing them to continue buying Iranian oil after it reimposed sanctions on Tehran. As the U.S. has no plans to renew the waivers when they expire in May, the need for alternative sources of supply could further lift demand for U.S. oil.
The U.S. shift from oil importer to exporter is likely to change the world’s political dynamics. The U.S. is becoming less reliant on the Middle East for its energy needs.
With the growing U.S. presence in the market, “OPEC’s ability to sway crude oil prices by cutting output may decline,” said Satoru Yoshida, a commodities analyst with Rakuten Securities. If the U.S. continues to increase shale oil outputs at a faster-than-expected pace, it will put downward pressure on crude oil prices over the long run.
Falling crude oil prices “could shake the fiscal foundations of oil-dependent Russia and the Middle East,” said Takayuki Nogami, chief economist at Jogmec, the Japan Oil, Gas and Metals National Corporation.