Readers of a certain vintage may recall cooling their heels in long lines at the filling station, queued up to receive the meager produce of American refineries during the Arab oil embargo of 1973 and the energy crisis of 1979.
U.S. oil production was declining rapidly just as major foreign producers formed a cartel to restrict output and jack up prices. Throughout the 1980s and 1990s, domestic production of oil and gas continued to wane, increasing our dependence on distant and sometimes hostile sources. By 2006, U.S. oil production had fallen by half, forcing us to import two thirds of our annual demand.
The outlook was bleak, prompting every president since Richard Nixon to pledge a drive for energy independence, but none was able to deliver. What happened next could only have transpired in America, where the confluence of innovation, capital and private property sparked a technological revolution that has literally altered the geopolitical map.
The revolution involves the combination and perfection of two relatively old practices: horizontal drilling and hydraulic fracturing.
Horizontal drilling succinctly describes the process of starting a well bore straight down, then turning the drill sideways to extend horizontally. First attempted in 1929, the process has evolved to yield modern wells that can run well over a mile deep before turning to extend three miles out, all within less than a month. Astounding.
Meanwhile, Civil War engineers discovered bombs exploded in underground water formations increased production of nearby oil wells. By the early 1940s, liquids under high pressure were substituted for torpedoes to fracture the rock walls of wells and release oil and gas trapped in the fissures. Today, this technique is called "hydraulic fracturing" and involves injecting fluid pressure along with sand to fill the crevices and allow the hydrocarbons to flow freely.
The result has been spectacular. According to the U.S. Energy Information Agency (EIA), horizontal fracking eclipsed all other drilling methods in 2011 by total footage, and in 2014 by number of wells. And the technological advance is still progressing. Today, there are fewer than half as many oil rigs drilling in the United States compared with 2014, while total production is expected to set new all-time records this year.
In fact, 2018 is likely to be the year in which American oil production exceeds that of Saudi Arabia, topping 10 million barrels per day. U.S. output is now so prolific that the global benchmark for oil prices, known as Brent Crude from the North Sea, is being challenged by the upstart West Texas Intermediate Crude price set at the delivery point of Cushing, Okla.
As for imports? Fuhgettaboutit. Today, we import less than 25 percent of our total petroleum demand, mostly because it is cheaper and more convenient. Canada is by far our largest foreign source, supplying more than three times what we import from Saudi Arabia. Message to OPEC: talk to the hand.
In fact, the United States is now a net exporter of petroleum products other than crude oil (natural gas liquids and refined products). And most remarkably, in 2016 American oil companies were allowed to export crude oil for the first time since 1977.
It is difficult to overstate the positive impact on U.S. economic vitality of this new energy revolution, particularly when considering the hypothetical scenario had it not occurred. In fact, it is likely the next crisis for the oil and gas industry will be one of overabundance, as cleaner alternatives to hydrocarbons gradually diminish our oil dependence over the next decade. Who could have imagined?
Only in America.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.