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N. America is new Middle East?

A new report from Citigroup, ‘North America, the New Middle East?’, says that North American supplies of oil, natural gas and biofuels could double from 2010 levels by 2020-22.

The Citi team estimates crude oil and natural-gas liquids output of North America has the potential to nearly double, to 27 million barrels per day by 2020 from 15.4 million barrels per day in 2011, while the rate of decline of consumption could accelerate.

“Five incremental sources of liquids growth could make North America the largest source of new supply in the next decade: oil sands production in Canada, deepwater in the US and Mexico, oil from shale and tight sands, natural gas liquids (NGLs) associated with the production of natural gas, and biofuels. Putting these together, North America as a whole could add over 11 million bpd in 2010 to almost 27 million bpd by 2020-22.

Authors of the report led by Edward L. Morse, head of global commodities research at Citigroup Global Markets, contend that the profound impact extends beyond energy. They project a sharp boost to US economic growth as the result of the boom in energy output; a further spur to the re-industrialisation of America, which already is under way; and a sharp contraction in the US current-account deficit that would significantly strengthen the dollar. And, perhaps most profoundly, the reduced dependence on Middle Eastern oil would have huge geopolitical implications.

Either way, North America is becoming the new Middle East. The main risk is politics will intervene and thwart the expansion of North American output — environmentalist getting the upper hand over supply in the US, for instance; or First Nations impeding pipeline expansion in Canada; or Mexican production continuing to trip over the Mexican Constitution, impeding foreign investment or technology transfers.”

Another reason for US to become a net exporter is the lower demand and a struggling economy which requires less imported energy. But, that would only get you half the answer.

US demand has fallen by some two million barrels per day since its peak in 2005 in part due to the recession but also due to a structural change due to demographic changes, policies on fuel efficiencies and the mass-commercialisation of technologies.

“The more exciting part of the answer is on the supply side as the US has become the fastest growing oil and natural gas producing area of the world and is now the most important marginal source for oil and gas globally. Add to this steadily growing Canadian production and a comeback in Mexican production and you get to a higher growth rate than all of OPEC can sustain,” the authors said in the report.

The shale gas production boom that propelled the fundamental change in the natural gas markets in the US could begin to transform other sectors including power generation and transportation. Other incremental gains could come from LNG exports with North America acting as the swing supplier for the world. But the most momentous change looks likely to be in the re-industrialisation of America based on dramatically lower cost feedstock than is available anywhere in the world, with the possible exception of Qatar, the Citigroup report said. The report added that the economic consequences from this supply and demand revolution are potentially extraordinary.

“We estimate that the cumulative impact of new production, reduced consumption and associated activity may increase real GDP by 2.0 to 3.3 per cent, or $370-$624 billion (in 2005 dollars), respectively. $274 billion of this comes directly from the output of new hydrocarbon production alone, while the rest is generated by multiplier effects as the surge in economic activity drives higher wealth, spending, consumption and investment effects that ripple through the economy.

“This potential re-industrialisation of the US economy is both profound and timely, occurring as the US struggles to shake off the lingering effects of the 2008 financial crisis.”

—issacjohn@khaleejtimes.com