Saturday 8 September 2012

The U.S. Oil Dependency Factor Drops

Here is a glimmer of good news for the U.S. Oil imports to the U.S., currently the world’s biggest oil importer drop, as efficiency gains reduce oil demand, and reliance on new supplies such as light tight oil is increasing. In this post, I would like to discuss America’s dropping oil dependency factor.
With less than 5 per cent of the world’s population, U.S. oil consumption, today, accounts for over 21 per cent of the world's total oil consumption – and it remains by far the largest user of oil, consuming approximately 19 million barrels of oil each day. The U.S imports about 9 million barrels per day of oil and Canada is number one supplier of oil to the U.S. However, the U.S has come a long way since 1970s in imroving its oil consumption.
In one of the previous posts, we discussed the relationship between nation’s GDP and oil consumption. A positive correlation between higher GDP and higher oil consumption continues to hold initially, however, as mature economies have a tendency to become more efficient over time, and able to sustain economic growth while oil consumption slows. The U.S. is a good example of this process of optimization.
The below Figure illustrates the production volume of the U.S., measured by GDP, compared with the country’s oil consumption, measure in millions of barrels per day. In the chart, oil consumption for each year between 1950 and 2011 has been paired with economic activity in the same year, or real GDP. We can observe that between 1950 and 1979, the rise in oil consumption kept pace with the increase in economic activity. In the chart, you can see a steep slop – reflecting a high oil dependency factor to grow economy.

This lasted until the 1970s, when the Arab oil embargo of 1973, combined with peaking oil production in the U.S., led to two years of recession, followed by above average inflation that continued for a decade. Under pressure, the U.S. managed to cut its oil intensity by almost half. We can see that the slope between 1983 and 2007 is much shallower – reflecting a low oil dependency factor, indicating that a great deal of economic growth was achieved in this period with a smaller amount of additional oil.

Continued gains in the efficiency of the U.S. economy are to be expected. According to the International Energy Agency, the U.S. will gradually be able to reduce its oil consumption from 19 million barrels per day (2011) to 14 million barrels per day (2035), while its economy continues to expand. The data points are trending downward in the chart (2011-2035 period) - reflecting a zero oil dependency factor. In other words, zero new oil is required to grow economy. The optimism is justified, if we consider that other developed nations, including Japan and several nations in Europe, have been able to achieve this, we can expect others (China, India, etc.) to follow in the future.

(Note: Opinions expressed here are my own and not that of Suncor)

8 comments:

  1. Mr. Patel, another great read ! Thanks.

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  2. Thank you Sanjay, very good article. It would be nice to plot a similar chart for other countries, if possible. Hows your book coming along?

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  3. Another good article. However a few things came to my mind after reading the article-

    It seems to me that the decrease in the dependence on oil can also be attributed to US smoving its manufacturing base (the secondary sector) to China and growing more only in the tertirary sector (services-especially the silicon valley)

    What can be the primary reason for decrease in dependence on oil in Japan and in other European nations? Is it because of better logistics involved in the transportation of goods ? more fuel efficient modes of transportation? or growth in the tertiary sector. In my opinion, we've made little progress in fuel efficiency, so the decrease in dependence is most likely because of the other two reasons

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    1. Good point Mainak. Energy efficiency and conservation is one of the main reasons for low oil consumption in England and other Europen countries. In Europe, people are taxed heavily on fuel (i.e. gasoline is very expensive) but they have an excellent public transportation unlike in North America. Penetration of renewables is another reason. The US is also trying to maximize renewables, especially biofuel, in gasoline and diesel. For instance, gasoline sold in the US, today, contains 10% ethanol and its share will increase in the future.

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  4. Jason Cartwright (Toronto)9 September 2012 at 08:02

    Great achievement and great presentation Sanjay. Your writing style is natural, to-the-point, and easy to follow and thats why I like your blog Sanjay. I wish you good luck for your book. I will be the first one to prebook. Let me know.

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  5. Great Sanjay. Keep up the good work.

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  6. Thank you Sanjay. It is interesting to see it presented this way.
    Personally I believe the trend will be even greater IF light end oil comes of the balance of the gas reserves as it has in North Dakota and the panhandle of Texas. The US could see 2+M bbl per day come off gas drilling which has already impacted the refining industries in Texas and the east coast...more to come as the US figures out the pipeline and rail infrastructure.
    We'll see?

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    1. Agreed, the real deal is to remove bottleneck from the Midwest and move oil to the Gulf coast. Keystone is a guessing game, all eyes are on Nov 6 election date.

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