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The Global Petroleum Market

In the form of a multiple entry composition we will be covering the global petroleum industry initially from a high-level macro view designed to supplement another series of posts regarding the various energy resources available to societies and the combined relationship with synfuels. Subsequently, the discussion will be taken down to a more regional level where the focus can be put more closely on individual actors, how activities will affect global supply, and what the consequences of public policy and technological development mean for nations and their economies. Over the coming weeks, we at Synfuels Americas will begin to delve deeper into the inner workings of the industry, and attempt to develop some potentialities for what the future could hold. This will be a holistic approach to the world’s supply energy fuels, societal development, environmental sustainability, and how a new era of global relations could be defined by the boost in supply of cheaper oil.

The global petroleum market is defined by its volatility and dynamism. For decades, the world saw the Middle East as the center of oil and gas production, remaining wary of any disruption in supply because of the implied consequences for economies, human development, and geopolitical relations. Over the last two decades that common perspective has been turned on its head by the redevelopment of Russian and former Soviet state fossil fuels, and the second-coming of American oil production alongside neighboring Canada’s rich heavy oil deposits.

Currently, the world is seeing a relative state of calm and ease for petroleum resources. The ability of U.S. producers to attain the 10mm b/d production level not seen since the 1970s is a feat many saw as impossible in the early years of the first decade of the 21st century. Oil prices globally were high, and consequently it was beginning to strain economies and the need for friendly relations with those mass oil producing nations constituting the OPEC cartel. This great plot turn leads us to a few questions that many in the public policy realm and in business seek to have answered:

  • How long can this new American shale production last?
  • Who will become the real swing producer?
  • What are the implications of human population growth and development for petroleum supplies?
  • How could the abundance of current supply affect policymaking decisions that will have consequences for the short and long term futures of societies?
  • What are the consequences for the environment with cheaper fossil fuels being so abundant?

The United States

According to the International Energy Agency the United States is expected to overtake Russia as the world’s largest oil producer. After crude output in the U.S. once again reached 10mm b/d late last year, the director of the IEA even went as far to say that he does not expect U.S. production to peak until 2020 or later. That leaves the world to deal with a new balance of power in crude markets.

For the past several decades Saudi Arabia and OPEC have ruled the global oil industry, but as of November of 2014 the Saudi Kingdom has been forced to protect its market share at the sake of prices. This is all a consequence of U.S. oil and gas producers streamlining their operations to target specific fossil fuel rich formations. The U.S. is also producing over 28 trillion cubic feet per year of natural gas. Most of the gas is used within North America as a fuel for electricity generation, but because of the low costs of production it can be shipped to Europe as liquefied natural gas. EIA estimates that U.S. dry natural gas production averaged 73.6 Bcf/d in 2017 and forecasts that natural gas production will reach 80.3 Bcf/d in 2018, establishing a new record. That level would be 6.7 Bcf/d higher than the 2017 level, and the 2017 forecasted growth would be the highest annual average growth on record. EIA expects natural gas production will also increase in 2019, with forecast growth of over 2 Bcf/d.

The LNG market for U.S. natural gas is also very strong. Global growth in LNG consumption is expected to be driven by Asian countries and their desire to meet climate goals. Many Asian and Southeast Asian countries are dependent on coal to power their infrastructure and feed their petrochemical industries. As these nations attempt to move away from coal power they will become large consumers of LNG from Russia and North America.

Currently, the United States is Russia’s prime competitor for LNG market share, but should tensions continue to rise between Europe and Russia we could see North America overtake Russia as Europe’s primary LNG supplier. Per Anne K.T. Hung, Energy and Mining Partner at global law firm Baker McKenzie’s Tokyo office:

“Contracts are getting shorter, there is more flexibility and more importantly counterparty risk is nothing like it was a decade ago. These days counterparties include the American exporters in one basket, oil and gas majors in another, and finally the pool of global traders. With so much choice, counterparty risk has inevitably come down.”

It’s a strategic challenge that the Russian state petroleum firm Gazprom is aware of. Gazprom pretty much abandoned the strategy of defending its price by keeping gas off the market. These days it is taking a similar approach to Saudi Aramco and dealing with lower prices and not sacrifice market share. In terms of total volume, the United States’ producers are still a growth oriented portfolio compared to the Gazprom, but they’re adaptability and capability to compete in the global market against such state-run behemoths speaks to the power of the U.S. petroleum industry.