Look Out, OPEC: America Is Exporting Fuel Again!

Was there anything about the condition of American society in the year 1949 that still exists today?

Very little actually comes to mind. There was, for instance, no interstate highway system in 1949; the government legislation that authorized its construction would not emerge until 1956. And the entire nation only owned two million television sets in 1949, with more than one third of them clustered in New York City. Furthermore, the minimum wage was a scant 75 cents an hour.

1949 was also the final year of a period of time in which the United States occupied a global role as a net exporter of fuel. Drilling wells in Pennsylvania, Texas, Oklahoma, and other states produced the crude oil that was then refined into fuel in the United States. The global economy, still rebuilding from the devastation of the Second World War, eagerly bought fuel from American suppliers.

Beginning in 1950, though, the American economy expanded to the point where the United States became a net importer of fuel. It then remained a net importer for the next six decades …

until, surprisingly, this year.

Supply and Demand

Why is the total amount of American fuel exports suddenly exceeding its total imports for the first time in sixty two years? As is the case with most aspects of our capitalist economy, the answer to this question can be described as a function of supply and demand.

For starters, American demand for fuel has declined for a pair of noteworthy reasons. The debilitating economic recession, and subsequent tepid recovery, have depressed economic activity and thus suppressed natural levels of demand. And numerous technological innovations, such as the introduction of electric automobiles that utilize little or no gasoline, have decreased America’s thirst for imported fuel as well.

Perhaps more surprisingly, the American production of recoverable energy assets has increased markedly during the past few years. Oil and gas production remains high in the United States, despite environmental concerns that were raised during last year’s BP’s Deepwater Horizon catastrophe. And new technologies are allowing energy producers to extract natural gas from shale rock in such novel locations as Arkansas and Pennsylvania; even New York State expects to initiate extraction activities in the near future.

With fuel supply up and fuel demand down, and with developing nations like China thirsty for energy products, it was probably inevitable that the American fuel trade gap between imports and exports would shrink. Nevertheless, very few pundits had foreseen that the United States would quite literally become a net fuel exporter.

Upstream vs. Downstream

Should OPEC become worried? Is America about to challenge it for control of the energy markets?

Well … not quite. After all, there is a major difference between upstream energy production and downstream production. Upstream products are extracted from the earth in their natural states. Crude oil, for instance, is an upstream product. Natural gas, embedded in shale rock, is an upstream product as well.

Downstream products, on the other hand, are energy materials that have been refined and packaged for use by consumers. Motor vehicle gasoline, for example, is a downstream product. So is propane oil, and so is firewood, for that matter.

The distinction between upstream and downstream products is a bit murkier when our attention turns to renewable energy sources. One might be tempted to define the wind and the water itself as upstream products, and the electricity produced by wind mills and hydro power plants as downstream products.

So America’s shale gas production would indeed represent an upstream activity that competes directly with OPEC’s upstream crude oil production business. But fuel is a downstream product, and thus America’s re-emergence as a net fuel exporter is no direct threat to OPEC.

Why Can’t We Be Friends?

There must necessarily, of course, be a direct relationship between upstream and downstream firms. Namely, upstream firms must sell their extracted products to downstream firms, which in turn must refine and package them for sale at the retail level. In other words, downstream firms must function as the “middle men” who represent the customers of the upstream firms.

So, if that’s true, then downstream fuel producers in nations like the United States are still reliant on (and are thus vulnerable to) upstream suppliers like OPEC. Conversely, crude oil suppliers like Iran are still reliant on (and, again, are thus vulnerable to) downstream customers like the United States.

So the re-emergence of the United States as a net exporter of fuel does not, regrettably, imply that the goal of American energy independence — as initially defined by President Richard Nixon during the Arab oil embargo of the 1970s — is about to become a reality. Nevertheless, as long as American downstream producers can continue to secure deliveries from their upstream providers, the United States should be able to avoid the prospect of fuel shortages during the upcoming winter months.