N. America's impact on the global oil supply chain

Photo Credit: iStockphoto.com

North America's recent surge in its supply of fossil fuels has sent shockwaves through oil markets. And this development--together with other forces such as sustained high oil prices and global demand and supply trends--is redefining the way in which oil is being produced, processed, traded and consumed around the world.

According to the International Energy Agency's 2013 Medium Term Oil Market Report, the United States shale gas and light tight oil and Canadian oil sands production are expected to account for more than half the increase in the global supply of energy over the next five years.

Several factors have supported the rise of North America's hydrocarbon revolution, says the report. They include the following:

• Rising demand from non-OECD countries, which is forecast to account for 54 percent of global oil consumption by 2018. Also, virtually all net crude distillation capacity growth will take place in the emerging markets and developing economies over the next five years, as OECD countries offshore their refining activities. OPEC's downward adjustments in its oil supply, especially after the political turmoil during the Arab spring and Syrian conflict, cannot sustain this rising demand. Therefore, non-OECD nations will have to source for alternative resources, enabling America's upstream discoveries to be more lucrative.

• OECD and non-OECD nations have been accepting of North America's supply of fossil fuels as these nations have taken pro-active steps to develop infrastructure to store and transport these fuels. For instance, current infrastructure has been designed to refine oil of heavier and sourer grades, while nations have taken steps to create new technologies to refine the exceptionally sweet and light tight oil.

• Another factor that has promoted North America's supply of fossil fuels is the United States' stronger-than-expected economic recovery, especially in recent months. Due to the changing fuel mix in the US, changing consumer behaviour as well as improvements in efficiency, the US is not seeking to sustain its economic growth by increasing its demand of oil, but rather through increasing the use of natural gas as a fuel.

• Furthermore, the challenges facing continued North American production--such as regulatory, logistical and environmental hurdles--may not be as daunting as they appear. "The industry has shown flexibility and ingenuity in coming up with new transport links to bring production to market and in tweaking refineries and petrochemical plants to handle the new feedstock," notes the report.

But even as North America brings stability to the global supply of energy, its supply revolution could inevitably result in negative repercussions on other markets. For example, North America's heightened level of competitiveness may weaken the position of European refineries. As a result, this would cause Europe to be more dependent on product imports, import terminals, and product storage facilities. With increased dependence on third-party suppliers and trading houses, European markets will be subjected to speculative activity, which may in turn work against the interest of refiners.

The report also touches on the outlook for OPEC oil. While it will continue to form part of the fuel mix, the projection of OPEC capacity growth has been adjusted downwards over the medium term, as several producers face challenging social and political transitions. Iraq continues to account for most of the incremental OPEC production capacity over the next five years, growing by almost 20 percent of global crude production capacity growth.

The 141-page report also covers demand trends. It notes that the East-of-Suez region is in the lead on the demand side. Non-OECD oil demand, led by Asia and the Middle East, looks set to overtake the OECD for the first time in as early as 2Q13 and will widen its lead afterwards. Non-OECD economies are already home to over half the global refining capacity. With that share only expected to grow by 2018, the non-OECD region will be firmly entrenched as the world's largest crude importer.

The Medium Term Oil Market Report is part of a series of medium-term forecasts that the IEA devotes to each of the main primary energy sources--oil, gas, coal and renewable energy.

BY :  International Energy Agency (IEA)