A remarkable and at one time unimaginable event occurred in 2020. No, not COVID-19. In 2020, the United States became energy independent.
It is widely under-appreciated that as the result of the fracking revolution, the U.S. has become the world’s largest oil producer, ahead of both Saudi Arabia and Russia, is a net exporter of crude oil and petroleum products and is the undisputed champion of liquefied natural gas. Yet despite the surplus, we still import about 7 million barrels of petroleum per day. If that sounds inconsistent, read on. It’s all about economics.
The answer lies in the ancient fleet of U.S. refineries. While a dozen or so small specialty facilities have popped up over the past couple of decades, the last large-scale U.S. oil refinery was built in 1977 when the world was a very different place. America was becoming increasingly dependent on imports as our own domestic supplies were drying up, a distressing prospect that seemed certain only to worsen.
It is important to understand that all oil is not the same. The imported crude on which we were dependent, primarily from OPEC, Russia and Mexico, is relatively heavy (dense) and sour (sulfurous). Almost all the major refineries along the Texas and Louisiana gulf coast and in the Midwest were designed and constructed to process this heavy, sour crude oil into its various constituents like gasoline, jet fuel and diesel. Huge amounts of capital were invested in these mammoth and complex facilities in response to the expectation that America would be shackled to imported oil into the foreseeable future.
It is frightening to imagine the toll on U.S. prosperity had that dystopian forecast come to pass. But in the event, something remarkable happened: a revolutionary technique known as hydraulic fracturing or “fracking” unleashed massive new supplies of oil and gas from shale formations like the Permian Basin, Eagle Ford and Bakken fields that were previously thought to be inaccessible.
As a result, U.S. oil production has soared by 150% since 2007, eclipsing Saudi Arabian and Russian output and creating a net surplus of domestic output. In 2015, Congress lifted the 40-year ban on exporting oil and in 2020 the U.S. began selling more oil and petroleum products than we purchase. In 2023, we exported 1.6 million barrels per day more than we imported as American production smashed previous records. Shazam.
So again, the question: Why do we continue to import oil if we produce more than enough of our own?
Unlike most of the heavy sour crude from OPEC and Mexico, the bountiful U.S. shale gusher is primarily the lower density, “sweet” (low sulfur) grade. This light sweet variety is easier to refine and therefore commands a higher price. It also costs more to produce by fracking compared with traditional fields in Russia or Saudi, which essentially involve sticking a straw in the ground.
Yet American refineries, as we have seen, are tooled to process the dirtier stuff that trades at discounted prices. Of course, Gulf Coast refiners could reconfigure facilities to process lighter U.S. crude, but the downtime and capital costs would be substantial. It turns out that it is simply cheaper and more profitable to import heavy oil to refine into finished products and to export the light sweet crude at higher prices.
Since 2008, U.S. imports from OPEC countries have dropped by nearly 80%, and it is fair to say we are no longer dependent on potentially hostile sources. On the contrary, most of our imported refining feedstocks come from allies, including Canada and Mexico.
While there has not been a large U.S. refinery built in 47 years, two new plants are on the drawing board to take advantage of abundant shale feedstocks. Dallas-based Element Fuels is raising capital to construct a unit in Brownsville, Texas, while another Texas company called Southern Rock Energy has announced plans for a large refinery near Cushing, Oklahoma.
Yet even assuming these plans come to fruition, it will be several years before gasoline starts flowing through the pipes. For now, both refiners and U.S. consumers benefit from importing heavy crude and exporting the lighter grade.
This dichotomy also illustrates substantial misinformation regarding U.S. energy production. While chants of “drill baby drill” are popular at rallies, they obscure the current reality of the domestic oil industry. In fact, producers have already been drilling, baby, and are currently sitting on about 4,500 oil and gas wells with holes punched in the ground but not yet producing.
These so-called drilled uncompleted wells serve as an inventory of future output that can be brought online within weeks or months once the producers decide to turn on the tap. A decade ago, too much debt-financed drilling led to overproduction that bankrupted dozens of exploration companies. Instead, energy producers are now more disciplined and are paying down debt and rewarding shareholders.
America’s newfound energy independence does not in any way lessen the imperative to move away from fossil fuels over the next 30 years, and some climate advocates decry the fracking revolution as an obstacle to adopting clean renewables and alternative sources more rapidly. They are not wrong, and we cannot allow copious U.S. petroleum supplies to sidetrack critical climate initiatives. But the shale revolution has effectively rendered the U.S. energy independent and provided a lifeline to smooth the transition to renewable sources with minimal economic pain.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
Christopher A. Hopkins