US Targets Energy Independence Despite COVID-19 Impacts

Summary //

Significant growth in domestic oil and natural gas production over the last decade has led to a sharp rise in US energy exports.
While the US has been a net exporter of natural gas since 2017, it is expected to be a net exporter of petroleum (crude and refined products) for the first time in 2020. However, the status of net exporter of petroleum is likely to be short-lived given the impact of COVID-19 on energy markets.
While the market impacts of COVID-19 may temporarily derail the net exporter status of the US, the long-term outlook for global energy exports and demand supports US energy independence.

US energy independence has long been a key goal for policymakers and oil and gas companies alike. Rapid growth in domestic oil and natural gas production, which have increased by 8.6% and 4.6% annually through the 2010s, respectively, has brought the US close to achieving that goal. While COVID-19’s impact on global energy demand and domestic oil production has likely disrupted progress towards consistent net exports, the US remains on the path to attaining energy independence. Ahead of Independence Day this weekend, today’s note examines the US’s role as a major energy exporter before and after coronavirus and the outlook for energy independence.

Crude and natural gas exports have risen sharply over the last decade.
Before diving into the data behind US energy independence, it is important to first define the term itself. In this piece, energy independence is defined as exporting more energy than is imported. Others may define energy independence as being completely self-sufficient. This scenario of total self-sufficiency is highly unlikely for the US for the foreseeable future due to a variety of factors. Complex US refineries prefer heavy and medium grade crude produced in Canada or overseas as opposed to the lighter crude typically produced in the Lower 48. While this generally leads to incremental exports of shale production, it necessitates imports. Additionally, refining capacity constraints in certain regions of the US, particularly on the East Coast, require the import of refined products in order to meet local demand. When the US first became an overall monthly net exporter of crude and petroleum products late last year, the Gulf Coast was the only region in the country that was not a local net importer. As a result of these nuances, imports will remain a crucial part of the US energy landscape, making energy independence only achievable in net exporter terms for the foreseeable future.

As domestic production of oil and natural gas ballooned in the 2010s, exports began to rise significantly. The charts below show the growth in US liquids and natural gas exports from January 2010 through April of this year. Natural gas exports have seen robust growth since 2015, driven by the boom in liquefied natural gas (LNG) exports. LNG exports, which represented less than 2% of overall natural gas exports in 2015 compared to over 50% in April, have benefited from several major capacity additions in recent years (read more). The US has been a consistent net exporter of natural gas since August 2017. Liquids exports, which include crude, petroleum products, and natural gas liquids, have grown steadily over the last decade, benefiting from the removal of a ban of oil exports in late 2015. The US first became a net exporter of crude and petroleum products in September 2019 but was still a net importer for 2019 overall. When including coal trade, the US achieved net total energy exports in 2019 for the first time since 1952. However, the US has been a net exporter of coal for decades, and true energy independence should not rely on coal, especially as it becomes a less important component of the US energy mix (read more). The key to energy independence will be maintaining the US’s newfound net exporter status for crude and petroleum products.

Progression towards net exports has been halted by COVID-19.
Given the significant increase in liquids exports, the dream of energy independence has become increasingly tangible for the US. As seen in the graph below, net imports of crude and petroleum products fell from nearly 5.1 million barrels per day (MMBpd) in 2014 to just under 0.6 MMBpd last year. In its January 2020 Short-Term Energy Outlook, the US Energy Information Administration (EIA) forecasted annual net exports of crude and petroleum products in 2020 for the first time since data series began in 1949. Trade data from earlier in the year shows that the US was well on its way meeting this goal. Based on forecasts from the EIA’s most recent Short-Term Energy Outlook, the US was a consistent net exporter of crude and petroleum products for the first four months of the year, reaching an estimated peak of 2.3 MMBpd of net exports in April.

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After a strong start to the year, the effects of COVID-19 began to show up in the oil trade in May. Oil production declines as a result of shut-in wells (read more) left fewer barrels available for export while demand for exports were also weak. Crude imports surged in late May, likely related in part to discounted barrels from Saudi Arabia sold during the OPEC+ price war arriving in US ports. Petroleum product imports have remained mostly constant throughout 2020, but exports have declined 27% off their mid-April peak as of the week of June 19 due to lower crude runs for refineries and lower global demand. May is expected to be the first month where imports outweigh exports since August of last year. Despite this setback, the US is still expected to report full-year crude and petroleum product net exports of roughly 0.4 MMBpd in 2020 per the EIA. However, the net exporter status may be fleeting. After briefly returning to net exports in June and July of this year, the EIA is forecasting that the US will be a net importer of crude and petroleum products in all but one month through the end of 2021. Expectations for annual net imports of 1.1 MMBpd in 2021 mark a significant reversal from previous predictions for net exports of 1.4 MMBpd. Long-term energy independence is still on the horizon for the US, but COVID-19 and its impact on oil markets has clearly disrupted the transition towards net exports.

US will continue to play a major role in the world energy landscape going forward.
While the supply and demand interruption from COVID-19 will continue to weigh on energy trade through 2021, the longer-term picture supports US energy independence with the US playing an increasingly important role in the global energy landscape. The International Energy Agency (IEA) expects that the US will become the world’s leading exporter of LNG by 2025, continuing the trend of rapid growth from recent years, though there have been several LNG cargo cancellations in the wake of COVID-19. Combined LNG exports from the US and Canada are expected to triple from 2019 to 2025, accounting for roughly 80% of incremental global LNG exports. The IEA is also projecting significant growth in US crude exports. After becoming the world’s second largest seaborne oil export hub in 2019, the Gulf Coast is expected to grow its oil exports by 2 MMBpd, or roughly 77%, over the next five years. Asia will be a key destination for both US natural gas and oil, with China and India expected to represent a combined 60% of incremental LNG import growth through 2025. Asia is also expected to represent 77% of oil demand growth over the same time period, while local oil production is forecasted decline, increasing the reliance on imports.

Bottom Line
Energy independence has been a political and industry talking point for decades. While technically achieved in 2019 when including coal, energy independence excluding coal may be compromised in 2020 and 2021 by the market impacts from COVID-19. Despite these near-term headwinds, long-term trends in energy exports are likely to not only cement the US as a key player in the global energy landscape but to firmly establish energy independence.

US Targets Energy Independence Despite COVID-19 Impacts

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