The petroleum industry consists of processes for the exploration and production of crude oil and natural gas, for refining these products into a variety of useful final forms, and for the transportation, storage, and distribution of all intermediate and final products. In 2020, world oil production amounted to about 76 million barrels per day, down nearly 10% from 2019 production. The three largest oil producers in the world are the United States, Russia, and Saudi Arabia. U.S. production has more than doubled since 2008, owing chiefly to new extraction technologies. Prior to 2008, U.S. oil production peaked in 1970, then began a forty-year decline, bottoming out in 2008.
U.S. renaissance due to new technologies
The new technology driving the recent U.S. oil boom consists of hydrofracturing and horizontal drilling. Hydrofracturing is the process of extracting petroleum from source rock by pumping a mixture of water, chemicals, and sand into the seam to open up channels through which the oil can more easily flow. Hydrofracturing technology has made it possible for the U.S. to greatly increase petroleum output by extracting more oil from previously worked-out deposits. The other chief technological advance has been in the area of horizontal drilling. This permits drilling along the seam of source rock
without relying on the oil to percolate upward into an easily accessible pool. These technologies are considerably more expensive per unit of extracted oil than older technologies. For this reason, they rely on higher oil prices in order to be economical.
Once extracted or imported, crude oil is delivered to refineries for conversion into useful final products. Nearly half of U.S. refinery output is in the form of motor gasoline, and another fifth is distillate and residual fuel oil. These fuel oils consist of diesel fuel and other fuel oils used for electric power generation and, to a limited and decreasing extent, for home heating. Most of the rest of refinery output is in the form of hydrocarbon gas liquids, mostly propane.
Imports and exports
In 2020, the U.S. became a net exporter of petroleum. Imports peaked in 2006; since then,
imports have been generally declining while exports have been growing strongly. Crude oil amounted to about 38% of total exported petroleum products in 2020, up from about 1.5% in 2011. The majority of imported petroleum, mostly from Canada and Mexico, is in the form of crude oil which is delivered to domestic refineries. Imports of petroleum grew
rapidly during the decade of the seventies, peaking in 1977. Imports declined sharply over the next five years as conservation measures were put in place in the wake of the Iranian Revolution and the supply shortages caused by the Iran-Iraq war. Import reliance grew from just over 27% in 1985 to just over 60% in 2005. Import reliance has declined to zero
over the last fifteen years.
Renewable energy sources such as methanol, hydroelectric, wind, and solar power have grown rapidly over the last twenty years, but the total output of renewable energy is still a small part of total energy consumption. Historically, about 9% of total energy production comes from renewable sources. Over the last fourteen years, however, this has increased to about 12%. Most of these increases followed the implementation of the expanded Renewable Fuel Standard in 2007.
Petroleum and its by-products
Petroleum is formed when small organisms such as algae and other sorts of plankton are buried under layers of rock and subjected to heat and high pressure over long periods of time. The proportion of oil and natural gas in a petroleum deposit will depend on the nature of the rock layers in which it is trapped and the original composition of the materials that went into making it. Petroleum is extracted from the earth by a process of drilling down to the layers where it is trapped. If the output of the well is mostly liquid, it is known as an oil well. If mostly gas, it is a gas well.
Crude oil is a viscous, black liquid found underground in particular kinds of geological
formations. It consists mostly of hydrocarbon molecules of various lengths and structures,
together with other organic compounds. Crude oil is just one component of petroleum, which also includes lighter molecules in the form of natural gas. These gases are mostly methane but with a large mixture of heavier gases like propane and butane.
Oil prices rose significantly during the early years of this century. Prices then collapsed during the Great Recession, but over the next two years prices returned to pre-recession levels. Increasing U.S. production and declining world demand eventually led to an oversupply of crude oil in 2014-2015 with a consequent sharp decline in prices. Prices have recovered from their depressed pandemic levels and appear to be operating within a $20/bl range in the last few months, though with more volatility than existed before the pandemic. Part of this increased volatility results from the uneven path of the COVID-
19 virus and the slow return of production.
Between 2010 and 2019, the output of the oil & gas extraction industry, as measured by the Federal Reserve’s Industrial Production Index, grew at an average annual rate of 7.9%. In April and May of 2020, production declined more than 17%. Nearly half of those losses were recovered in the next two months, but output has been essentially constant over the last year. Output has not increased with prices as producers waited to see if prices near
$80/bl would be sustained. So far, they have not.
Extraction of crude oil and natural gas declined in 2020 as demand cratered due to the coronavirus pandemic. Until pricing recovers and the pandemic effects show signs of permanent reductions, the domestic oil and gas industry will be hard pressed to see output increase. Following significant declines in 2020, we estimate a further decline of 0.5% in 2021. Oil markets could be further rattled by pandemic-induced uncertainty as well as a more aggressive regulatory posture from the Biden administration.
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