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Do We Still Need Saudi Arabia With Record U.S. Oil Production? – Valero Energy Corporation (VLO), Phillips 66 (PSX)

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According to recently released data, the U.S. is pumping out more oil than it has in at least two decades, led by rapid production increases in Texas and North Dakota. As a result, Gulf Coast refiners have drastically reduced their reliance on foreign imports of certain grades of crude oil. The question remains, do we still need oil imports from the Middle East?

The United States does continue to remain uncomfortably dependent on crude imports from the Persian Gulf, which raises important policy questions about America’s future role in that region’s security.

Valero Energy Corporation (NYSE:VLO)U.S. oil output soars to record high
According to annual data released last week by the U.S. Department of Energy, U.S. crude production increased by 812,000 barrels per day last year, which represents the most rapid yearly increase since the first commercially viable oil well was drilled near Titusville, Pa., in 1859.

For the months of November and December, U.S. daily oil production rose above 7 million barrels per day for the first time in at least two decades. Meanwhile, net crude imports into the U.S. declined by 437,000 barrels per day to 8.5 million barrels per day – the lowest level in 15 years.

Importantly, crude shipments from the Organization of the Petroleum Exporting Counties, or OPEC, fell overall, though imports from some member nations of the cartel, like Saudi Arabia, rose. More on that later.

Texas and North Dakota lead the way
North Dakota and Texas led the output gains, with North Dakota’s field production of crude oil coming in at 769,000 barrels per day in December, while Texas produced more than 2.2 million barrels per day in the same month. In Texas, the Eagle Ford Shale and the Permian Basin provided the biggest boosts to the state’s overall production, while the famous Bakken Shale accounted for the bulk of North Dakota’s production gains.

The data underscore a major trend under way in these states. Thanks to new technologies like hydraulic fracturing and horizontal drilling, as well as enhanced oil recovery, that have made it economical to access reserves previously thought unrecoverable, oil companies drilling in these states have seen drastic improvements in the total quantities of oil recovered.

As a result, Texas field production of crude oil has more than doubled in just three years, from 31.4 million barrels in February 2010 to 62.4 million barrels in November 2012. Production growth in North Dakota has been even more staggering, rising threefold over the same time period, from 7.3 million barrels to 21.9 million barrels.

The majority of this new oil output is light, sweet crude, which has a lower sulfur content and is less viscous than heavy, sour crude. One of the major consequences of this has been the dramatic reduction in Gulf Coast refiners’ reliance on foreign imports of this type of oil.

Gulf Coast refiners reduce light oil imports
For years, many refineries, including those along the Gulf Coast, and especially those along the East Coast, have had to import light, sweet crude oil from abroad, mainly from OPEC’s two largest West African members, Nigeria and Angola. But with rapid advances in the domestic production of light, sweet crudes over recent years, these countries are being forced to look elsewhere for new export markets.

According to data from the EIA, the U.S. has reduced its imports of Nigerian crude by about half since July 2010, from over 1 million barrels a day to 543,000 barrels per day as of October 2012. And last year, Nigerian imports plunged by 363,000 barrels per day. Similarly, Angolan imports have fallen to less than 200,000 barrels per day, down from a 2008 average of 513,000.

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