Things change fast in modern economies. One of the biggest changes of the last decade is America’s boom in energy production. Scan through an archive of news stories from 2006, and you’ll find headlines like “U.S. oil imports at record high.” Scan through today’s news, and you’ll find headlines like, “U.S. oil imports to fall to 25-year low.”
For years, it was assumed that America’s insatiable appetite for oil would spike prices and balloon the trade deficit. But this fear relied on two assumptions: That domestic energy production had peaked, and that demand for oil would continue to rise. Both turned out wrong. As a result, net oil imports in 2012 hit the lowest level since 1993, and are on track to fall to the lowest level since the 1980s next year. It is one of the most important economic developments of the last decade. And by most accounts, it’s just getting started.
A few charts tell the story.
The first is energy demand. A good way to measure it is total crude products supplied, or the amount of oil the economy is consuming:
We consumed less oil in 2012 than we did in 1997. Consider that the U.S. population grew by 43 million during that period, and the change is extraordinary.
Part of the decline — perhaps most — is due to the weak economy. Less employment and lower incomes means fewer vacations, fewer road trips, and putting on a sweater in lieu of turning up the heat. After rising uninterrupted for three decades, Americans drove 40 billion fewer miles in 2012 than in 2005.
But another downward push on demand is efficiency. Daniel Yergin, an energy analyst who won a Pulitzer for his book, The Prize, calls energy efficiency and conservation “the fifth fuel,” writing that, “many would not even think of it as a fuel or an energy source. Yet in terms of impact, it certainly is.” He goes on:
The United States uses less than half as much energy for every unit of GDP as it did in the 1970s … a new car in the 1970s might have averaged 13.5 miles to every gallon. Today, on a fleet average basis, a new car is required to get 30.2 miles per gallon.
The boost in efficiency and conservation is mostly driven by price. Changing behavior requires incentives. ”The key to high prices is high prices,” as the saying goes.The last conservation push that led to a drop in demand occurred in the early 1980s, coming off an oil shock and soaring gas prices. The 2008 oil spike looks like it also changed consumer behavior. The vehicles that capture our imagination shifted from Hummers and Excursions to Teslas and hybrids.
Beyond falling demand, domestic oil production is booming like it hasn’t in decades.
For as long as we have been drilling oil, we have been worried that we’re on the cusp of running out of it. Yet, the story ends the same way every time: Tight supplies push prices up, and higher prices provide the incentive for oil companies to invent new ways to extract more oil out of the ground than we ever knew existed.
Last decade was no different. Conservation complacency of the 1990s, combined with burgeoning demand from Asia, sent oil prices from $11 a barrel in 1999, to $140 a barrel by 2008. It was terrifying — many thought we hit a point where oil prices could only go up and, in 2008, the CEO of energy giant Gazprom predicted oil would soon hit $250 per barrel. But those high prices made if feasible for oil companies to utilize and improve technology. Fracking — cracking oil out of rock formations with pressurized water and sand — and horizontal drilling, took off.
“The key year was 2003,” Yergin recently told NBC. “That was when it was proof of concept. So for five years, it unfolded quietly with the independents. In 2008, that’s when the majors got interested.” Chesapeake Energy Corporation (NYSE:CHK)‘s 2004 annual report doesn’t contain a single mention of the words “hydraulic fracturing.” Last year, the words appeared 57 times.