MFA OIL
Where does our supply of oil come from?
By Galen B. Menard

The appetite for oil from a global perspective continues to grow at pace. Can it be maintained into the future? Although demand in the United States continues to grow at a rate of 2 to 3 percent per year, this is not the case for other parts of the world.

The demand for oil in Asia is growing at unbelievable rates and doesn’t appear to be subsiding. China has been in the forefront with double digit increases in demand for petroleum products. Plus, India is not that far behind. The potential untapped market in these two densely populated and developing countries for petroleum is huge, to say the least. As they have proven in recent history, if they want the crude oil, they will pay whatever it takes.

The United States refines approximately 16 million barrels of oil per day versus about 6 million barrels per day of domestic crude oil production. This means that about 10 million barrels of oil must be imported on a daily basis to feed the refineries. In addition to the imported oil, the United States also brings in approximately three million barrels per day of finished products to supplement its large appetite for gasoline and diesel products.

With the United States remaining a large consumer of crude oil beyond its own resources and the ever growing competition of demand growth in Europe, South America and Asia, the question often heard is “Where will the United States get its oil?”

The good news is that proven oil reserves in the world are adequate for the next 50 years or so, even at the current projected demand growth rates. The bad news is that the oil yet to be drilled is the most expensive to bring to the market. Oil exploration projects from the past which were located on easily accessible sites on land could cost anywhere from $1 to $3 million for a respectable find. In today’s oil production environment, a project will probably be offshore, like the Gulf of Mexico for example, at a cost of $1 to $3 billion.

It is difficult to talk about world oil supply without mentioning OPEC production. Although not a stronghold on oil markets as in the past, OPEC continues to be influential and important in terms of meeting future global supply. In 2005, OPEC accounted for 29.2 million barrels per day of the 83.7 million barrels of demand. OPEC has little spare capacity today, but has the potential to increase output significantly provided the necessary capital is available.

Additional growth areas for crude oil supply are the Gulf of Mexico, Russia, Africa and South America. However, the area providing the most potential to the United States in terms of supply is located right in our backyard. With reserves that could possibly match Saudi Arabia, Canada will be a dominant force into the future from a crude oil supply perspective.

Current production levels in Canada are at just over 3 million barrels, and they are looking to double that volume over the next 7 to 10 years. Additional pipeline capacity to the United States, as well as to the Pacific Northwest, will bring new crude supply sources to refineries in various parts of the world.

The new conventional production from Canada will be a heavy sour crude and not compatible with all refineries. To compete in the refining business, upgrades will need to be made to handle the increased sulfur and bottoms experienced running the heavy sour Canadian production. Synthetic bottomless crude oils will also be available from Canada, but they create a different set of refining issues which also must be addressed.

As previously mentioned, oil production in the United States currently stands at about six million barrels per day. The 10 million barrels per day shortfall must come from other sources outside the country. The current breakdown of imports is: South America 3.3 million barrels per day, Middle East 2.6 million barrels per day, Africa 2.3 million barrels per day and Canada 1.8 million barrels per day.

It doesn’t appear that the need for the United States to import significant volumes of crude oil will go away anytime soon, but the location of origin on the barrels could change in the years ahead. This all depends on pricing, quality and logistics.

Galen B. Menard is vice president of supply and trading for the National Cooperative Refinery Association.