Why Oil Is $100 Per Barrel Despite Booming American Oil Production

Jul. 9.13 | About: The United (USO)

When it comes to oil (NYSEARCA:USO) there are likely two charts that you are very familiar with.

The first is the chart that shows where the price of oil has been over the last three years.

For all of the headlines of "oil spikes" and "oil plummets" the reality is that since 2010 the price of WTI oil has been in a pretty steady range between $80 and $100. We seem to have found a bit of a happy spot for oil.

The other oil related chart that is familiar to most people now is the chart of booming American oil production that is the result of the horizontal drilling and multi-stage fracturing boom.

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After decades of what everyone thought was a permanent decline in American oil production the horizontal drilling boom has changed everything.

In 2012 American oil production was up a shocking million barrels per day.

The two graphs above don't really seem to go together. How can oil be so solidly in a steady range while the supply of the commodity has surged in the United States?

Why The Price of Oil Isn't Dropping

To understand why the price of oil isn't dropping despite the boom in American production we need to look at everywhere else in the world. After all, the United States has only 320 million of the 7.2 billion people who inhabit this planet.

There are things going on outside of the United States as well that have an impact.

Here are the global reasons that oil prices aren't dropping.

1-Emerging Demand Growth

The above chart is pretty mind-boggling for a person who has never seen it. That is the world population and it has gone hyperbolic in the past century.

I don't know how anyone could look at this chart and not immediately become concerned about the strain this incredible population growth must be putting on the world's resources.

As the global population continues to grow by the minute so too does demand for oil. And according to the US census bureau the world's population is going to continue growing by at least half a billion people each decade through 2050.


Total world population


(mid-year figures)


































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But we aren't just fighting a constant population increase that drives growth in oil demand. We also have the vast majority of the world increasing its per capita oil consumption every year.

Yes, those of us in the developed world are actually decreasing our oil consumption. But we represent only a small percentage of the 7.2 billion people in the world. It is the billions of people in China, India, Brazil and Africa who are every day fighting to have a higher standard of living that are significantly increasing their oil consumption.

According to the CIA World Factbook, for every 1,000 people in the United States 61 barrels of oil are consumed every day. In China, that number is 7 barrels of oil. In India it is 3 barrels of oil. Those two countries have a combined 2.5 billion people and could double, triple, even quadruple their oil consumption per capita and still not come close to what each person in the United States uses.

The key point from this demand growth is that every year the world needs to add almost one million barrels per day of oil production just to keep up with demand growth from these emerging countries.

Last year United States oil production did the unthinkable and increased by one million barrels per day. That incredible accomplishment was entirely wiped out by demand growth elsewhere in the world.

Every year we basically need to grow production like we did in the United States in 2012 just to keep up with demand growth.

2-Saudi Arabia's Production Decrease

In 2013, while the United States oil production was booming, Saudi Arabia was doing something very different with its production.

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In late 2012 Saudi Arabia dropped the amount of oil it produces by almost 1 million barrels per day from 10 million barrels to 9 million barrels. That has obviously helped keep a floor under global oil prices.

Saudi Arabia has long been the only country that really moves its production around to set the price of oil. 2012 once again demonstrated that the Saudis have both the means and the will to do what is necessary to support the price of oil.

3-Reduction in Iran's Oil Exports

In an effort to stop Iran's nuclear program, the West has imposed sanctions on the country. One of those sanctions involves not purchasing oil from Iran.

Last month Iran exported 700,000 barrels of oil which is only one-third of the 2.2 million barrels per day it exported prior to this latest round of sanctions being imposed.

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Like the Saudi Arabian production cut, these sanctions have taken a lot of oil off the market.

When does Iran's production come back to the market? Who knows.

It Only Gets Harder From Here

So while the American production boom has been incredible. Emerging demand growth, the Saudi Arabian production cut and the sanctions on Iran have more than offset the progress made in the United States.

That is why the price of oil has not fallen despite American production growth.

What concerns me and is why I'm long oil producers is that I'm sure emerging country oil demand growth is going to continue year after year. Meanwhile 2012's production growth in the United States is not likely going to be repeated. Yes, American production will grow, but at slower rates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.