If you had told an oil analyst seven years ago that by 2014 the U.S. would import only 6 million barrels of crude oil per day, or roughly a third of what the country uses, he would have been incredulous. Imports back then accounted for roughly two-thirds of U.S. oil consumption, according to the federal Energy Information Administration, and had been rising for 30 years. With all its major fields discovered and production dropping, America seemed destined to import more and more oil, especially from Canada, Mexico, Venezuela, Saudi Arabia, and West Africa.
Then came hydraulic fracturing—the technique of blasting water into shale to extract oil and gas—and the energy picture in the U.S. changed dramatically in a few short years. Now the International Energy Agency predicts that by 2020, U.S. oil production will exceed Saudi Arabia’s. This is altering decades of established trading patterns.
Most of America’s new shale production is light, sweet crude that can be easily refined into gasoline and that is prized around the world. Light, sweet crude is less viscous than heavy, sour crude, which has more sulfur. But heavy, sour crude tends to be a few dollars per barrel cheaper than light, sweet crude, and the Canadians and Venezuelans have vast reserves of it. That’s why in the years before the U.S. shale boom hit, some of the biggest U.S. refiners spent more than $20 billion upgrading their refineries so they could process the gunky stuff into gasoline, asphalt, and other products.
Now, those refineries that modified their plants to handle heavy crude are trapped. If they buy light, sweet oil, they’ve wasted their investment. “I think those refineries will be reluctant to eat the cost of those new coker units they’ve installed,” says Timothy Evans, an analyst at Citigroup. (Coker units break down oil into different gases and liquids.) The best way for them to get a return on that investment, he says, is to process heavy, sour crude, which has better margins because of its lower cost.
Thus, despite the abundance of high-quality crude, demand for heavy, sour oil from abroad will be high in the years to come. For those reasons Canada will remain America’s biggest supplier. Not only is Canada close and able to pipe its oil over the border, but its heavy, sour crude is also what U.S. refiners want.
Canadian pipeline operator TransCanada is trying to get U.S. approval of its Keystone XL pipeline, which would eventually move 1.5 million barrels a day of heavy, sour Canadian crude to Gulf Coast refineries. The pipeline would lower shipping costs for the Canadians and make their oil even cheaper than the crude sold to the U.S. by Mexico (it sells 1 million barrels a day to the U.S.), Saudi Arabia (1.2 million), and Venezuela (950,000). “The Gulf Coast market’s not big enough to take new Canadian crude and maintain current imports,” says Edward Morse, head of commodities research at Citigroup Global Markets. “Something has to give.”
While the demand for heavy, sour crude will be good news for Canada, the shale oil revolution in the U.S. will likely result in a steep drop in oil imports from Africa, mainly from OPEC’s biggest West African members, Nigeria and Angola. Both are suppliers of light, sweet crude. Since July 2010, the U.S. has cut its Nigerian imports by half, from more than 1 million barrels a day to 543,000 as of October 2012, according to the most recent data available through the EIA. Imports from Angola have dipped below 200,000 barrels a day, from an average of 513,000 in 2008. “By the second quarter of this year, we will stop importing West African light, sweet crude into the Gulf,” Morse predicts. Sometime before mid-2014, he says the U.S. and Canada will stop importing crude from West Africa altogether.
Those barrels will have to find another home. The surplus African oil could end up competing with Mideast suppliers for customers in India, China, Europe, and Korea. As the global competition heats up, oil prices the world over will probably drop. Morse says that $90 will be the new ceiling for oil prices rather than the floor it’s been in recent years, a transition he anticipates will be “highly disruptive.”
The geopolitical fallout from this shift in the global oil trade could be disruptive too. Angola, Nigeria, and Venezuela are heavily dependent on oil revenues to keep their governments afloat and maintain popular subsidies that lower the price of food and fuel for their citizens. If Morse is right and the average global price of oil drifts below $90 a barrel, the pressure on the weaker oil states could become intense.