The U.S. is now the world’s largest oil producer, but pipeline bottlenecks might ruin the scene

  Photo: shutterstock.com

Photo: shutterstock.com

The Energy Information Administration (EIA) announced yesterday that the U.S. has now possibly edged out Russia and Saudi Arabia to emerge as the largest crude oil producer in this world, based on preliminary production estimates from EIA’s Short-Term Energy Outlook (STEO). The U.S. produced 10.9 million barrels per day (bpd) in August, with EIA forecasting an average of 10.7 million bpd in 2018, a rise of 1.3 million bpd from last year.

In many ways, the rise of U.S. as one of the largest producers of crude oil has been on the cards since the day Trump assumed office on the promise of making the U.S. a dominant energy player in the world by concentrating on oil and gas production and exports. The result was a meteoric rise in production, going from less than 9 million bpd in early 2017 to 10.9 million bpd now.

The EIA further estimates that production would average 11.5 million bpd next year, which would hopefully help consolidate its position at the top of the global energy charts. A large part of the crude oil production has been made possible by beefing up extraction across the Permian Basin in Texas and New Mexico, the Federal Offshore Gulf of Mexico, and the Bakken region in North Dakota and Montana.

However, to continue pumping out more oil, the U.S. needs to address its pipeline capacity woes that stem out of an oil production glut in the Permian region. The West Texan region is ‘suffering’ from an oil production surplus, which has forced suppliers to run massive discounts on prices of crude oil which in turn could play spoilsport to the U.S. ambitions of increasing production.

The Permian basin has a capacity that runs to around 3.4 million bpd, which accounts for both takeaway and local refining capacity. Production levels across the region hover around 3.4 million bpd as well, which would mean that a slight mismatch in the figures could quickly exacerbate the situation.

The produced oil needs to find a way to the trading hubs of Cushing or the Gulf Coast, which is predominantly done via pipelines. In the case of a pipeline crunch, producers are forced to move their oil through trucks and on railroads, which would considerably increase the value of the product. Nonetheless, S&P Global believes the concerns would not last long, estimating that there would be an additional 3.66 million bpd capacity pipelines laid out by 2020.

However, as current capacity situations remain dire, drillers from the Permian are quitting new oil wells unable to tackle the pipeline bottlenecks that has taken a toll. Unfinished wells have now risen to 3,303 in June - a 90% increase in number from 2017. The problem is particularly hard felt on smaller companies, because if they do not get to lock pipeline space in time, they would be left hanging when the crunch kicks in.

That being said, the complications that arise due to the production and capacity conundrum would have a significant bearing on the cost of global crude oil prices - especially since Iran’s oil export is under question after the U.S. threatened the Middle Eastern country with sanctions after withdrawing from the Iran Nuclear Deal. For instance, the WTI rates rose to $70.37 per barrel from $69.25 yesterday based on information that U.S. crude inventories dropped by 5.3 million barrels last week.

With the uncertainty around Iran’s presence in global oil supply and the economic implosion of Venezuela, the oil exports the beleaguered countries accounted for would now have to be shouldered by countries like the U.S., Russia, and Saudi Arabia. Russian energy minister Alexander Novak had mentioned that they might boost production by another 300,000 bpd in the short-term to reduce volatility arising from the Iran crisis, which if done would see Russia displace the U.S. from being the largest oil producer in the world. Then again, he also added that there had been no concrete decisions on the increase and the country would take steps as the situation demands.