Domestic Oil Production Rises — Along With Prices?

As the U.S. and Canada break oil production records, consumers wonder whether the boom will provide any relief to their wallets.
By @TrishaMarczakMP |
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    A tar sands mining operation sprawls in Alberta, Canada. (Photo/Howl Arts Collective via Flickr)

    A tar sands mining operation sprawls in Alberta, Canada. (Photo/Howl Arts Collective via Flickr)

    As the U.S. and Canada tout record-breaking years for oil production, consumers are questioning whether the booming industry will provide the promised relief to their pocketbooks.

    While 2012 was a record year for domestic oil production in the U.S., motorists have seen prices rise at the pump by as much as 30 cents per gallon during that same time frame. This week, The Wall Street Journal reported commercial crude-oil stockpiles were up by 3 million barrels, totalling nearly 380 million. Since 2008, the stockpiles have increased 30 percent.

    Alberta, Canada, is now considered home to the world’s third-largest oil reserves, behind Saudi Arabia and Venezuela. In 2011, the Alberta energy department indicated it had 170.2 billion barrels of “proven oil reserves,” accounting for roughly 11 percent of worldwide reserves.

    In the U.S., the Bakken oil fields of North Dakota have emerged as a powerhouse for the industry, producing 21.5 million barrels of oil per month.

    Yet despite the expanded oil production, Americans waiting for relief at the pump could best be advised not to hold their breath, according to industry analysts.

     

    Oil production is up, prices remain high

    Gregg Laskoski, a senior petroleum analyst at GasBuddy, believes the emerging North American oil production will have an impact on consumers. Yet he says it will likely be gradual, and will also have to do with a downgrade in the use of fuel among consumers.

    “I think we’re more likely to see prices decline in the long term, and there are several reasons. Generally speaking, we’re not using nearly as much oil and gasoline today as we did five, 10, 15 years ago,” he said in an interview with Mint Press News.

    It’s not because consumers are turning away from oil, but rather because automobiles and other technology are being built in ways that require less fuel.

    While the long-term projection indicates a decline, consumers at the pump are still paying more than they did one year ago, despite an increase in production.

    In April, the U.S. was producing 6.41 million barrels of oil a day — up 14 percent from 2011. But prices at the pump have remained somewhat steady over the two-year period. In Green Bay, Wis., prices are similar to where they were at this point two years ago.

    Looking back to June 2012, though, gasoline prices in places like Illinois are nearly 30 cents higher than they were a year ago, during the same season.

    This comes not only at a time of record domestic oil production, but also at a time when the U.S. increased oil imports from Saudi Arabia. According to the New York Times, oil imports from the kingdom increased by 20 percent last year.

    By 2015, the U.S. is expected to generate 10 million barrels per day, with output climbing to 11.1 million by 2020, according to the International Energy Agency. Now, consumers are wondering when — or if — the production will pay off at the pump.

     

    Not all oil created equal  

    Not all analysts are convinced prices will go down, as the oil extraction methods in the U.S. and Canada are more energy- and labor-intensive.

    In short, it costs more to produce one barrel a day in the U.S. or Canada than it does in Saudi Arabia.

    Extracting Alberta’s oil sands wasn’t even considered an economically viable venture until 2003, according to Worldwatch Institute.

    “Novel technologies and the existence of economies of scale have made the Alberta Oil Sands an economically viable resource,” a Center for Energy Economics report states. “Attractive fiscal terms have made the Alberta Oil Sands a resource where large scale investments are taking place. This despite the high upfront capital costs associated with oil sands production.”

    According to the Alberta energy department, it takes, on average, roughly 2 tons of mined oil sands to produce a barrel of synthetic crude oil.

    The scenario isn’t too different in the U.S., where new technology has allowed fracking to make its way into neighborhoods and farmlands.

    In the U.S., the process of extracting oil is labor-intensive, as fracking is a technical process by which water, chemicals and silica sand are shot into the earth to break up shale formations and provide access to oil deposits. The production cost per barrel is roughly $70, according to David Houseknecht, a U.S. Geological Survey scientist.

    Houseknecht told the MIT Technology Review that the difference between production costs for oil in Saudi Arabia and shale oil in the U.S., which is extracted through hydraulic fracturing, differs by roughly $60 a barrel.

    The process of extracting oil in Saudi Arabia doesn’t require the same technology and technique — the high-grade crude oil is shallow, allowing for easy access. According to Houseknecht, production costs vary, but typically come in around $10 per barrel.

    “Oil shale costs significantly more to produce than oil in Saudi Arabia and many other parts of the world, so for oil companies to go after this resource, oil prices need to stay relatively high,” author Kevin Bullis asserts in Technology Review.

    While production costs associated with fracking may require more economic input on behalf of the oil companies, Laskoski argues that transportation costs may help make up the difference.

    “I think the additional supply of resources certainly should give us a lot of hope,” Laskoski said. “Much of the fuel we’re talking about is in North America. It makes a lot of sense to try to obtain that fuel rather than going to Saudi Arabia.”

     

    EPA regulations impact prices

    Aside from an overall increase in production, gas prices are subject other industry factors. Laskoski said the recent spike in gas prices has to do with the seasonal gasoline price calendar — one regulated by the government, not the industry.

    “The EPA requires refineries to produce summer blend gasoline,” he told Mint Press News. “The purpose behind this is to have a fuel that burns cleaner during the summer months.”

    The regulations have been mandated by the EPA for the last 20 years with the objective of reducing smog in larger cities, according to Laskoski.

    For oil companies, the cost to refine the summer blend is more expensive, and that cost is handed down to the consumers. The new form of gasoline must become available on the market no later than May 1.

    Starting Oct. 1, the “winter blend” makes its way onto the scene, often leading to a decrease in cost.

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