In June 2008, a Manufacturer’s Alliance for Productivity and Innovation (MAPI) paper entitled “The Future of Oil: Are We There Yet?” discussed the determinants of the price of oil. At the time, the price was rising sharply but had not yet reached its peak of $147 per barrel, a level reached the following month.

The report also summarized competing views regarding the future of oil production. Pessimists argued that the level of world production was nearing its peak and that it would be increasingly difficult and expensive to accommodate the growing demand for oil. Consequently, the world price of oil was expected to rise significantly over time.

Those who were more optimistic pointed to the considerable potential oil production available from offshore areas in the U.S. and in the Arctic National Wildlife Refuge in Alaska (to which access is restricted) as well as to growing production in Brazil and the Arctic. Saudi Arabia was in the process of bringing a new field “on-stream,” and one analyst argued that a 10% improvement in extraction efficiency would “unlock” 1.2-1.6 trillion barrels of oil worldwide. The MAPI report concluded that the future of oil would likely be clearer in another 18 months (i.e. by sometime in 2010).

At the time the 2008 paper was released, there was more agreement regarding the future of natural gas, at least with respect to the U.S. Natural gas production was expected to level off, and the U.S. could not count on ever-increasing imports from Canada to meet the growing demand because Canada was diverting its increased production of natural gas for the purpose of extracting oil from its huge oil sand reserves. The price of natural gas was trending upward and was subject to several dramatic and unprecedented (though short-lived) spikes after 2005. The consensus view was that imports of liquefied natural gas (LNG) would be the source of additional gas supplies and would help dampen what seemed to be an inevitable rise in the price of natural gas. Based on this consensus view, two companies invested billions of dollars to construct three new LNG terminals on the Gulf Coast, and the Federal Energy Regulatory Commission (FERC) was deluged with permits to build others.

The future for oil and natural gas has become clearer with the spread of hydraulic fracturing, the full potential of which was not recognized even a few years ago. Hydraulic-fracturing techniques have been around since 1947, but it is the coupling of this method with horizontal drilling that enables producers to extract more oil and natural gas from the extensive shale formations found in the U.S.

Rising oil and natural gas production is providing a stimulus to the economy, contributing toward reducing the trade deficit and increasing the security of energy supplies. The manufacturing sector stands to gain from the increased activity since it requires manufactured products and has a positive impact on overall economic growth.

To view the full 10-page report, visit www.heattreat.net and log in to the “Members Only Area” and click on “Oil & Natural Gas Report.” If you are not a member, contact MTI at 904-249-0448 or info@heattreat.net.

Provided by: Don Norman, Ph.D., Senior Economist, Manufacturers Alliance for Productivity and Innovation