The U.S. is losing its spot as the world’s number one oil producer due to the recent oil price crash, dissipating demand and a collapse in capital investment, according to energy experts. This could become a national security issue.
“If we continue where we are with these low prices, we’ll see a big decline in U.S. oil production. It will no longer be number one,” Dan Yergin, energy expert and vice chairman of IHS Markit, told CNBC’s “Capital Connection” on Monday.
In 2018, the U.S. became the top oil producer globally, as the nation surpassed the output of Saudi Arabia and Russia amid the shale oil boom.
The coronavirus lockdown, and the oil price war between Saudi Arabia and Russia starting early March, brought crude prices down 65% year-to-date. The global benchmark for Brent crude traded at $22.78 per barrel and West Texas Intermediate at $20.39 per barrel on Monday morning in London––the lowest levels in almost two decades.
Until March, Saudi Arabia had cut production to increase oil prices in a so-called “scorched earth” strategy, but then reversed that course and slashed its crude prices and flooded the market with cheap oil in pursuit of greater global market share.
Russia is increasing its own production, as well, while other Saudi Arabia OPEC allies like the United Arab Emirates to open their taps once the previously-agreed OPEC+ output cut deal expires on April 1.
The price war parallels plunging demand due to the forced economic shutdown designed to retard the spread of the coronavirus.
“We see in this coming month of April what could be a 20 million barrel a day decline in oil demand. It’s unprecedented,” Yergin said. “That’s six times larger than the biggest downturn during the financial crisis period.”
Edward Bell, commodities analyst at Dubai-based bank Emirates NBD, told CNBC he thinks it is almost a guarantee that the U.S. will lose its top spot. “And it might happen probably a lot faster than we anticipate.”
An estimated 750,000 barrel per day decline from the second quarter onward takes U.S. output from 13 million barrels per day at the beginning of 2020 to “down below Saudi Arabia or Russia by the end of the year.”
He added that the US doesn’t have a lot of tools to address this. “The U.S. government doesn’t have a lot of tools to address this however beyond diplomacy … because oil production is really controlled and regulated by the states,” said Yergin.
Secretary of State Mike Pompeo urged Saudi Arabia Crown Prince Mohammed bin Salman, to “rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty.”
Moscow and Riyadh say they can live with low oil prices for some time. Higher-cost producers, such as those in the U.S. shale patch, “are already operationally inefficient… and the pain will only get worse,” according Ehsan Khoman, director of MENA research at MUFG Bank in Dubai.
Companies in America’s shale country have slashed costs, put capital investment on hold, and laid off workers. In the last two weeks alone, 59 rigs have been shut down, most of which in Texas’ shale-rich Permian basin, according to Emirates NBD.
“Where we are with prices now, we’re going to see a major decline in U.S. production,” Yergin said. “And so it has gone from being an economic issue to also being a national security and energy security issue … the administration sees U.S. being basically the world’s largest oil producer and exporter as a plus in terms of foreign policy, in terms of their role in the world, and that could be now retreating if we’re in this low price world, if it continues for some time.”
Yergin added: “When that happens, prices go down further, production gets shut in, and I think the prices we’re seeing today are really precursors to what we’re going to see. April is going to be a really difficult month.”