It is amazing how fast U.S. energy production has gained traction in our imaginations. One minute, the country is talking up a need to move toward energy independence; the next, it is on the verge of becoming the world's largest oil producer, according to the International Energy Agency.
James Hamilton at Econbrowser highlights the transition this way: Just eight months ago, the U.S. Energy Information Administration estimated that crude oil production from "tight formations" (accessed through fracking) would total 2.3 million barrels a day in 2013; now the EIA is estimating production of 3.5 million barrels a day this year.
Similarly, eight months ago, the EIA believed production would increase by half a million barrels a day annually before peaking at 2020; now, it is saying the increase will be 1.3 million barrels a day by 2021.
"Those numbers along with the EIA's other projections imply that total U.S. field production of crude oil from all sources would reach 9.6 [million] b/d in 2019 – almost as high as the all-time U.S. peak in 1970 – before resuming its decline," Mr. Hamilton said.
And if you add in natural gas liquids and ethanol produced from corn, total U.S. energy production would top the historical peak by a wide margin.
The question, then, is why this surging level of production – up nearly fivefold over the past five years – hasn't had an impact on the price of oil. West Texas Intermediate, the U.S. benchmark crude, is up 8 per cent in 2013; North Sea Brent crude is flat.
The answer, according to Mr. Hamilton, is because without an increase in U.S. and Canadian oil production, global supply of oil would have declined between 2005 and 2012.
As well, demand from emerging market economies has more than eaten up the new production. In other words, U.S. production is filling a gap.
You would think that this role would propel U.S. energy stocks, but the results so far have been mixed. Yes, the S&P 500 Energy subindex rose about 20 per cent in 2013 – but that gives it laggard status, given that the S&P 500 rose about 28 per cent during the year.
Break things down a little more, though, and you can see that investors are showing relatively little interest in the giant integrated producers (up less than 16 per cent this year) and drillers (up just 5 per cent).
Instead, the biggest gains by far have come from refiners – Tesoro Corp. and Phillips 66 are two examples – which, as an industry group, have surged 43 per cent.
Also showing impressive gains, oil and gas exploration and production firms (ConocoPhillips and Chesapeake Energy Corp. are two examples) have risen 25 per cent; and equipment and services firms (Schlumberger Ltd.) have risen 26 per cent.
The U.S. energy boom is big, and getting bigger. But the market is being selective – a healthy sign that should persist in 2014 if the price of crude oil holds relatively steady.