A shale-oil boom will thrust the U.S. ahead of Saudi Arabia as the world's largest oil producer by 2020, a radical shift that could profoundly transform not just the world's energy supplies but also its geopolitics, the International Energy Agency said.
The U.S. will overtake Saudi Arabia as the world's largest oil producer by 2020 due to a boom in shale oil. How will that impact global energy supplies and geopolitics? Liam Denning reports on the Markets Hub.
In its closely watched annual World Energy Outlook, the IEA, which advises industrialized nations on their energy policies, said the global energy map "is being redrawn by the resurgence in oil and gas production in the United States."
The assessment, released Monday, contrasts with last year, when it envisioned Russia and Saudi Arabia vying for the top position.
"By around 2020, the United States is projected to become the largest global oil producer" and to overtake Saudi Arabia for a time, the agency said. "The result is a continued fall in U.S. oil imports [currently at 20% of its needs] to the extent that North America becomes a net oil exporter around 2030."
This shift will be driven primarily by the faster-than-expected development of hydrocarbon resources locked in shale and other tight rock formations that have just started to be unlocked by a new combination of two technologies: hydraulic fracturing and horizontal drilling.
The IEA's projections show U.S. oil production peaking in 2020 at 11.1 million barrels a day, up from 8.1 million barrels a day in 2011.
Within a decade, the IEA forecasts that U.S. oil imports will drop by more than half to just four million barrels a day, from 10 million barrels a day currently. Much of this decline will be because of higher domestic production, but efforts to improve energy efficiency in the transport sector will also prove significant, the IEA said.
The IEA's conclusions are partly backed by the Organization of the Petroleum Exporting Countries, which acknowledged for the first time last week that shale oil would significantly diminish its share of the U.S. market.
OPEC said the U.S. would import less than two million barrels a day in 2035, almost three-quarters less than it does today.
That isn't to say OPEC's role will be marginalized globally. The organization's share of global production will increase to 50% in 2035 from 42% today, with much of it going to Asia, according to the IEA.
It said the U.S. need for oil imports from the Middle East will fall to almost zero in the next 10 years, while almost 90% of Middle Eastern oil exports will go to Asia by 2035, creating a new trade axis. The IEA hinted that U.S. energy independence could redefine military alliances, with Asian nations replacing the U.S. in securing oil shipping lanes from the Persian Gulf.
"Asian countries should have much greater interest in the stability and security of their suppliers in the Middle East," said Richard Jones, deputy executive director at the IEA.
Some in the U.S. are already questioning the reasons for keeping U.S. warships in the Persian Gulf. "It's insane that we have the Fifth Fleet of the U.S. Navy tied up there to protect oil that ends up in China and Europe," T. Boone Pickens, chief executive of energy-focused hedge fund BP Capital Management, was quoted as saying last week in the U.S. magazine Parade.
The IEA said, however, that U.S. primacy in world oil production could prove short-lived.
"If no new [U.S.] resources are discovered and if the [oil] prices are not as high as today, then we may see Saudi Arabia coming back as the first producer again," said Faith Birol, chief economist and director of global energy economics at IEA.
The IEA warned that the emergence of shale gas as a game changer in global energy has a downside risk, in that it will contribute to increased competition for water resources needed for energy projects.
Shale oil and gas are extracted by pumping water, sand and chemicals into the ground at high pressure to crack rocks open, a process known as hydraulic fracturing, or "fracking."
But the intensive use of water, "will increasingly impose additional costs," and could "threaten the viability of projects" for shale oil and gas, and also biofuels, the agency said.