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U.S. Oil Markets: Independence or Interdependence (Part I)

U.S. oil supplies including production, imports & exports

U.S. Oil Markets: Independence or Interdependence (Part I)

U.S. Oil Supplies


U.S. retail gasoline prices recently hit all-time highs.  The U.S. and world are on edge as oil markets tighten as a result of sanctions on Russian oil exports.  Long-cycle renewable fuel sources cannot quickly offset the loss of Russian supplies, making U.S. oil and energy supply certainty economic and national security concerns as energy prices pinch everyday Americans.

Many people want to know, isn't the U.S. Energy Independent?  

In short, the answer is its complex.

This three-part series will attempt to answer these question and provide insights into the U.S. oil market landscape, including where the oil the U.S. consumes comes from and what factors drive gasoline prices.

Part I:  U.S. Oil Supplies - domestic production, imports and exports

Part II: Refining Process - inputs, outputs, crude oil differences, margins

Part III: Federal Lease Analysis

Retail Fuel & Oil Prices

Retail gasoline and diesel prices are high and hitting consumers at a time when inflation is running hot across other commodities and expenses.  Likewise, oil is near-all time highs.  Unsurprisingly, the long-term charts of both oil and retail fuel prices are visually similar.  

The factors driving this move higher in price are different and in many ways more difficult to manage than long-forgotten but similarly high prices in 2008 and 2014.  Of note, the spread between highest and lowest gasoline and diesel prices across the U.S. has widened in recent years driven by reduced regional refining capacity and more stringent environmental regulations.

As we'll discuss more in Part II, diesel supplies are even tighter than gasoline, leading to a more explosive recent move to the upside.

In the U.S., oil is the largest single contributor to the retail prices of gasoline or diesel at around 55% of the of the price you pay at the pump.  The remainder is comprised of refining margins, state & federal taxes, transportation, marketing and retail margins.

With higher taxes in California or Europe, oil would represent a lower percentage of the retail price of gasoline.

Oil Supplies

Oil markets are complex.  U.S. oil supplies are domestically produced or imported.  We'll discuss in more detail in Part II as to why, but the U.S. is likely to remain a net importer of oil for the foreseeable future.

Following the oil shale revolution in the U.S., domestic oil production has risen dramatically in recent years.  The reality of the U.S. production surge, however, is that it's been concentrated in just a few states and oil basins.  Further, despite the headlines and political rhetoric, most of the oil production is the U.S. comes from private lands, where U.S. government leasing and permitting is not needed for drilling, although government or environmental reviews can impact takeaway capacity.

Only six U.S. States produce more than 350,000 barrels of oil per day.

There are four oil basins in the U.S. producing more than 1 million barrels of oil per day, led by the Permian Basin located in Texas and New Mexico.

73% of U.S. oil production comes from Private lands, 16% from Federal Offshore, primarily the Gulf of Mexico, and 11% from Onshore Federal leases.

Since overall U.S. oil production peaked in late 2019, oil production from onshore Federal leases is up 6%, offshore Federal leases are down 11% and Private leases are down 13%.

It should be visible that the U.S. oil growth story is a short one.  Texas and New Mexico in the Permian are the growth areas.  Without contributions from offshore or other basins it may be difficult for U.S. oil production to materially exceed prior highs.  

Click the image below to see an interactive visualization of U.S. oil production and imports

Rig Counts and Financial Conditions

Domestic oil production is partially driven by how many wells are drilled which is a function of rigs at work.  The correlation of rig counts to production has decreased in recent years, however.  Lateral/sideways drilling and lateral feet drilled mean more today than the absolute number of holes poked in the ground. Further, the industry had accumulated a large drilled-but-uncompleted (DUC) well inventory, allowing years of wells to be completed and produced from prior period drilling.

The number of rigs the industry utilizes is often a function of the financial condition of the industry.  Despite the nearly consensus view of the general public that oil companies are currently gouging consumers, the reality is the industry went through a financial crisis between 2015-2021, with hundreds of bankruptcies aggregating to over $300 billion of defaulted debt.  

Oil prices were negative briefly in 2020 during the COVID outbreak, but the industry was in a considerable retrenchment before the world economy shut down.  After years of losses, oil & gas investors have demanded a return on capital and more prudent supply management rather than growth for growth sake.

U.S. Oil Imports & Exports

Although the U.S. is now the #1 oil producer in the world, America is still reliant on foreign oil.  Over the last year, the U.S. imported roughly 6 million barrels of oil per day and exported approximately 3 million barrels per day.

U.S. oil exports are a relatively new entrant onto global markets.  Outside Alaska, U.S. oil was not exported prior to a crude oil export ban being lifted in 2015.  As shown in the second tab of the chart below, U.S. net oil imports have never really dipped much below 2 million barrels per day.

Oil markets are global.  The U.S. is the largest producer and consumer of oil in the world.  Domestic supplies matter, but as an importer and exporter, the U.S. is intertwined with global oil markets.

Part II will discuss the disposition of crude through the refining process, the crude oil mismatch in the U.S., and refining margins, among other items.

Part III will be an in-depth analysis of oil production on U.S. Federal leases.

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