EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Crude Oil

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Economists have long recognized that we are truly a global society and all of our economies are intrinsically tied-together. Growth or recession in one region of the world could have a ripple effect on other regions. China and India were emerging as large-scale industrial countries with vast exports of manufactured goods. Both were consuming new, higher levels of energy (figure 3), and most specifically, crude oil. News of increasing crude imports by both countries sparked buying of the financial commodity contracts. 

The so-called “speculators” were blamed for a lot of the price increase that year, but there was a whole new set of players who greatly influenced the market. Investment funds and private investors, both domestic and international, saw the crude market as a “safe harbor” from the ups-and-downs of the stock market and the US dollar. When the stock market fell, they bought crude oil contracts. And when it rose, they sold those same contracts. The dollar is a little more complicated. When the value of the US dollar falls relative to foreign currency, overseas investors have more “buying power,” that is, they can buy more crude with their currency than those holding US dollars. So to some extent, it is true that “traders” had a major influence on oil prices that year. But the definition of “trader” had changed from the stereotypical “day trader,” who wreaks havoc on markets, to sophisticated investors and real demand from emerging nations.

Today, the economic health of various countries still impacts the volatility in oil prices, and the US dollar and crude prices have a very high but inverse correlation. And, geopolitical conflicts involving oil-producing countries and regions always cause concern over potential supply disruptions.

US oil production has risen steadily over the past years (prior to 2015) and currently (2016) stands at about 9.0 million Bbl. per day. This represents a increase from 2008 to 2015 and in 2015 stood at a 30 year high. Production from 2014 to 2016 has been over 8.0 million Bbl/d. In 2016 U.S. crude oil production represents only about 55% of consumption (EIA), with the remainder coming in the from of imports. However, as Figure 2 shows, imports continue to decline as domestic crude supplies increase.

The rise in domestic oil production is mostly attributed to the new, “unconventional”, sources found in shale formations. Advances in seismology (“3-D”), directional drilling (“horizontal”) and, fracturing methods (“fracking”), have made this once inaccessible resource commonplace today. Contrary to some beliefs, the number one source of imported crude oil in the US is not the Middle East but, Canada. Oil from tar sands in their Western Provinces is shipped via pipeline into the US. 

Figure 1 is extracted from the EIA report on the U.S. crude oil production. Figure 1 shows the upward trend in oil production over the (6) years before 2015. (Based on the latest completed study by the Energy Information Agency of the US Department of Energy.) This link from the eia includes the historical data from the 20th century.

Figure 1: U.S. Crude Oil Production (Million barrels per day) 2000 - 2016
Source: EIA

Figure 2 shows the downward trend in oil imports for the same time period (2000 - 2016).

Figure 2: U.S. Net Crude Oil and Petroleum Products Imports (million barrels per day) 2000 - 2016
Source: EIA

Crude oil is produced in 31 states in the United States and as of 2016 about 65% of domestic crude oil production comes from the following five states:

  • Texas: 36%
  • North Dakota: 12%
  • California: 6%
  • Alaska: 6%
  • Oklahoma: 5%

Crude oil is produced in about counties around the world. In 2016 about 48% of the world oil production comes from the following five countries: 

  • Russia: 13%
  • Saudi Arabia: 13%
  • United States: 11%
  • Iraq: 6%
  • Iran: 5%

Here are the top five oil consumer countries in the world in 2015:

  • United States: 20%
  • China: 13%
  • India: 4%
  • Japan: 4%
  • Russia: 4%

According to EIA:

"In 2016, the United States imported approximately 10.1 million barrels per day (MMb/d) of petroleum from about 70 countries. Petroleum includes crude oil, natural gas plant liquids, liquefied refinery gases, refined petroleum products such as gasoline and diesel fuel, and biofuels including ethanol and biodiesel. About 78% of gross petroleum imports were crude oil. In 2016, the United States exported about 5.2 MMb/d of petroleum to 101 countries. Most of the exports were petroleum products. The resulting net imports (imports minus exports) of petroleum were about 4.9 MMb/d.

Here are top five countries that US is importing oil from with their share in 2016

  • Canada: 3.80 million barrels per day (38%)
  • Saudi Arabia: 1.11 million barrels per day (11%) 
  • Venezuela: 0.80 million barrels per day (8%)
  • Mexico: 0.67 million barrels per day (7%)
  • Colombia: 0.48 million barrels per day (5%)

Figure 3 displays the China and India oil production and consumption since 90’s. As you can see in this graph oil consumption by these two countries has increased substantially during the past two decades, which their oil production hasn't changed significantly. This gap has created a large oil demand from these two counties in the global oil market.

Figure 3: China and India oil production and consumption
Source: EIA and EI