ENERGY SECURITY

Crude oil is a commodity that is traded on a global scale, and events, weather, politics, and economics in nations throughout the world can all have an impact on the price of crude produced right here at home. There are about 100 countries that produce crude oil, but according to the Energy Information Administration, five countries accounted for 50% of the world’s total oil production in 2020. Those countries included the United States, Russia, Saudi Arabia, Iraq and Canada.[1]

Oil producers in the U.S. and Canada are largely made up of private or investor-owned companies and their ability to produce is largely driven by financial markets and the ability to make a profit from their investment. If they cannot make a profit or at least make enough money to cover their expenses (employees, costs of drilling, etc.), they cannot invest in additional exploration and development. Countries like Russia and Saudi Arabia, however, have national oil companies (NOCs), or companies that operate as extensions of their government or a government agency. Their objectives are not always market-oriented and their incentive to produce more or less oil may depend on other goals that include but are not limited to furthering their government’s domestic or foreign policies, controlling or influencing oil prices to generate revenues for their countries or government programs, and employing citizens, among others.

The higher the demand for a product, the higher the cost until supply can catch up. The oil industry, like any other industry, seeks to find a balance between supply and demand to help create stable prices for them and the consumer. The past few years, however, have presented unprecedented challenges that have lent uncertainty to global markets.

The onset of the COVID-19 pandemic caused demand to plummet as travel restrictions kept people at home and business activity and manufacturing slowed to a stand-still. On April 20, 2020, crude oil prices fell to minus $37 per barrel for the first time in history due to oversupply and a price war between Russia and Saudi Arabia.

As travel restrictions began to ease and businesses and countries opened up once again, demand slowly began to rise and supply rose with it, but the current turmoil in Ukraine has caused demand and prices to rise faster than expected and are now above $100 per barrel compared to the -$37 just two years ago.

It’s also important to make a distinction between oil production and refining. Most oil producers don’t refine the crude they produce into gasoline, but rather sell their product to a midstream company, which then sells it to a refiner. A comparison that many of us in North Dakota can relate to is agriculture. Farmers don’t process (or refine) their crop into pasta, bread or other products. Rather, they sell it to an elevator that then sells it to a company that will use the crop to make any number of products (bread, pasta, oil, feedstock, etc.). That company then sells the product to us—the consumer.

In the same way, the oil producer will sell their products to a midstream company that will then refine the product into gasoline, diesel fuel, butane, propane, polypropylene (used to make plastics), or other feedstocks. A company will buy those feedstocks to then make their product, which includes more than 6,000 different products ranging from plastic toys, chemicals for paint, and even guaiacol, which is used to make imitation vanilla used for cooking and baking. Those products are then sold to consumers. Each stage adds costs that affect the end price of the product.

[1] https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php

For many years, the U.S. was reliant on other countries for crude oil resources—countries that do not share the same values and would often seek to do us harm. Thanks to technology and innovation, the U.S. was able to produce more energy from within our borders and have helped increase our energy security. In fact, for the first time since at least 1949, the U.S.  became a net exporter. In 2020, annual petroleum net imports were actually negative (at -0.65 MMb/d), the first time this occurred since at least 1949.[1]

However, because oil production in the U.S. is done primarily by private companies, our industry is more sensitive to economics and pricing. Other countries, particularly those that fall under the Organization of the Petroleum Exporting Countries, have national oil companies (NOCs), or companies that operate as extensions of their government or a government agency. Often, these countries use their energy resource as a means of influencing the price of oil or even influencing foreign policy, which can—and has—resulted in drastic price swings in the global market.

[1] https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php

Oil and gas development is a complex process and requires many things for a company to increase production.

A sound (and predictable) regulatory framework:

The industry needs a sound and predictable regulatory framework that will provide certainty while also protecting our communities and environment. North Dakota is fortunate to have one in place, but producers here are still impacted by decisions made in other states and at the national level. Federal policies have added many new restrictions and regulations that slow or stop the process of oil and gas development. Some ways that the federal government can help is to allow more and faster permitting for new wells, maintain reasonable regulations on operation, and allow for the permitting and construction of new pipelines to help get petroleum to market.

Investment:

In recent years, activists have pressured banks and investors into reducing or even stopping investment in traditional energy resources such as coal, oil and natural gas. As a result, there is a lack of capital and often desire from banking institutions and Wall Street to invest in the exploration and development of petroleum. Developing energy resources is an expensive undertaking, and without access to capital, ramping up production is difficult.

Infrastructure:

Oil and natural gas development often takes place in remote areas and must be transported to population centers where refining and processing plants are located. That product also needs infrastructure to get the product to market and consumers.

The U.S. has more than 190,000 miles of liquid petroleum pipelines that connect producing areas to refineries and chemical plants. But, more is needed. While North Dakota has been an oil-producing state since 1952, it wasn’t until the last decade that it became one of the largest producers in the nation. More pipelines were and continue to be needed to accommodate this increased production. In addition, some of the nation’s pipeline infrastructure is old and needs replacing or updating, but even this is often met with protest. If we wish to be energy-independent, we need more and better infrastructure to continue developing our petroleum resources in a safe, reliable, and environmentally-sound way.

Workforce:

The oil and gas industry employs hundreds of thousands of people, ranging from blue-collared workers to skilled tradesmen to white-collar office jobs like engineers and accountants. Especially for those operating on the rig and in the field, these jobs can be dangerous if workers aren’t properly trained.

To help eliminate some of the risk associated with oil and gas development, workers must undergo rigorous safety training, which takes time. It’s also very difficult to recruit workers to states like North Dakota that can experience harsh weather conditions that swing from bitter cold temperatures in the winter to sweltering heat in the summer. And finally, the ups and downs of the industry often detract workers from entering the industry. A stable and steady workplace and industry can help give workers more confidence that they will have a job for many years.

Until September 2021, North Dakota had been the second-largest producer before development in New Mexico’s Permian Basin overtook the Bakken-Three Forks. The U.S. Geological Survey estimates that 4.3 billion barrels and 4.9 trillion cubic feet of gas are technically recoverable (or in other words, can be recovered with today’s technology or processes),[1] though other estimates have shown that there may be as much as 500 billion barrels of total oil in place. A more conservative estimate conducted by the North Dakota Geological Survey estimates there are 167 billion barrels of oil that has been generated, though not technically recoverable with current technology.[2] Innovation and enhanced oil recovery such as carbon sequestration and capture is the key to unlocking these vast reserves.

Despite advances made in renewable energy, the Energy Information Administration projects that petroleum and natural gas will remain the most-consumed sources of energy in the U.S. through at least 2050 and the world’s energy use in 2040 will still depend on oil and natural gas. The U.S. has an opportunity to maintain its role as a leading energy producer, lending energy security to our nation and allies throughout the world.

[1] https://www.usgs.gov/news/national-news-release/usgs-releases-oil-and-gas-assessment-bakken-and-three-forks-formations?fbclid=IwAR1SbrZZIsoO-9hqStYpGrwMjTwml6N_w8YScnBkagILkfyPB02lvAEZcdo#:~:text=and%20North%20Dakota.-,The%20USGS%20has%20completed%20an%20oil%20and%20gas%20estimate%20for,gas%20in%20the%20two%20formations

[2] https://undeerc.org/bakken/oilproduction.aspx?fbclid=IwAR1ffHOXsBa4sn8q1K-J3GXbSVMjg3EJ7tMOjz6u3vbTWxSw3XU08TaHsQA