A New American Oil Bonanza

Source: By CLIFFORD KRAUSSAUG, New York Times • Posted: Tuesday, September 2, 2014

THREE RIVERS, Tex. — Whenever overseas turmoil has pushed energy prices higher in the past, John and Beth Hughes have curbed their driving by eating at home more and shopping locally. But the current crises in Ukraine and Iraq did not stop them from making the two-hour drive to San Antonio to visit the Alamo, have a chicken fried steak lunch, and buy fish for their tank before driving home to Corpus Christi.

“We were able to take a day-cation because of the lower gas prices,” said Ms. Hughes.

The reason for the improved economics of road travel can be found 10,000 feet below the ground here, where the South Texas Eagle Ford shale is providing more than a million new barrels of oil supplies to the world market every day. United States refinery production in recent weeks reached record highs and left supply depots flush, cushioning the impact of all the instability surrounding traditional global oil fields.

Nowhere is the boom bigger than in Texas, home to two of three of the nation’s biggest shale-oil drilling frenzies. While oil rushes are nothing new to the state of J.R. Ewing andSpindletop, the new bonanza has doubled the state’s crude production over the last two years, suddenly making Texas a bigger producer than either Kuwait or Venezuela.

The Eagle Ford field surrounding this refinery town is responsible for more than half of Texas’ new bounty. The production frenzy here and other shale fields in West Texas and North Dakota, all made possible by horizontal drilling and hydraulic fracturing, techniques that crack oil and gas out of hard shale rock with blasts of water, sand and chemicals, has lowered the country’s dependence on imported oil by more than a third in recent years.

Most of the price of gasoline is determined by the world price of crude, now hovering around $100 a barrel. Turmoil in major producer countries like Iraq and Libya does matter. But the new source of American energy means more supply has been added to global markets — almost the exact amount that has been taken off the market at times because of unrest in the Middle East and Africa over the last five years.

The United States now accounts for 10 percent of the world’s oil production. As it sharply curtails imports from countries like Angola and Nigeria, those producers are then compelled to sell their oil to China and other Asian markets at steep discounts, compounding the impact of American production on world markets.

The change can be seen just down the road from the gas station here, where a pipeline that once brought foreign oil from the gulf port of Corpus Christi to Valero’s Three Rivers refinery has been reversed, sending Texas crude to other refineries along the coast for processing into diesel and other products for export to Europe, Africa and Latin America.

“Softening oil prices was inevitable,” said Sadad Ibrahim al-Husseini, former head of exploration and development at Saudi Aramco, referring to the increase in American output. He added that “geopolitical turmoil has been a limited factor in recent weeks” largely because shifting conditions in “Egypt, Syria, Iraq and Ukraine have not actually disrupted any major oil export streams.”

Alejandro Alvarado, in Whitsett, Tex., says the lower gas price helps buy school clothes and shoes for his four children. CreditMichael Stravato for The New York Times

Global oil markets only faintly resemble those of the summer of 2008 when oil prices soared to over $147 a barrel, the all-time nominal record, caused by a combination of unrest in Venezuela and Nigeria, a steady decline in United States production, and soaring consumption in China, India and much of the developing world. The average price of a gallon of regular gasoline in the United States hit $4.11 that July.

Prices quickly collapsed after the 2008 financial crisis, but had stabilized by 2011. One reason is that growth in demand for oil, particularly in the United States and Europe, slackened because of the weak economy and increasingly efficient vehicles. North American supplies continued to grow, while Saudi Arabia and Iraq increased production to compensate for the loss of Libyan supplies and Iranian exports pinched by Western sanctions.

Last summer, oil and gas prices rose for a time as President Obama considered an attack on Syria and disgruntled Libyan guards blocked major oil ports, but prices quickly retreated. Rising production in Iraq, Saudi Arabia, Canada and especially the United States served as a cushion.

Again prices began to rise this year in early June, as Islamic fighters advanced in Iraq and tensions rose in Ukraine. Prices began to retreat again just in time for the Fourth of July weekend.

In a recent report, the AAA auto club predicted that prices would continue to slide through the end of the summer unless a major hurricane hits Gulf of Mexico fields and refineries, or there are other unexpected refinery disruptions.

Dangers remain abroad, of course. The terrorist offensive in Iraq has not yet touched the country’s most productive southern oil fields and exports so far, although future production is in doubt with Western companies removing personnel for security reasons. Sanctions on Russia for its intervention in Ukraine may impede Western financing and technology for future drilling in the Arctic. And while several Libyan oil ports recently reopened, militia violence is escalating.

But that hasn’t stopped Alejandro Alvarado, a restaurant cook in the town of San Diego, Tex., from appreciating the lower prices he is paying at the pump. “When you save on a gallon of gas, it helps pay for the cellphone bill,” he said while pumping fuel the other day. “It helps us buy school clothes and shoes for our four kids.”