Daniel Yergin and other experts say that U.S. tight oil is the swing oil producer of the world.

They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

A swing producer must meet the following criteria:

A swing producer must be a net exporter of oil.

A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.

A swing producer must be able to act authoritatively and quickly to increase or decrease output.

In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.

A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

So, let’s go down the list for OPEC and U.S. tight oil.

OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.



Figure 1. OPEC and U.S. 2014 net crude oil exports.

Source: OPEC & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

This will not be substantially changed by the repeal of the crude oil export ban because U.S. consumption of crude oil (16.3mmbpd) exceeds domestic production (9.2 mmbpd) by 7.1 mmbpd. If exports of tight oil increase, imports will have to increase by an equal amount to meet demand.

That should be enough to end the discussion about whether U.S. tight oil is a swing producer but I will finish going through the list.

OPEC exists because none of its members alone meet the criteria needed to balance the market and affect price. OPEC produces 31.4 mmbpd of the crude oil + condensate (47% of world production). It has approximately 1.5 million barrels per day (mmbpd) of spare capacity, and it has 72% (1220 billion barrels of oil) of the world’s proven reserves (Figure 2). The members of the cartel represent countries whose leaders have the authority to cut or increase oil production at will. Saudi Arabia alone has about $660 billion in cash reserves. It’s production costs are less than $10 per barrel.



Figure 2. Comparison of OPEC and U.S. tight oil production, spare capacity and reserves.

Source: EIA, Drilling Info & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

U.S. tight oil accounts for less than 5% of the world’s production of crude oil + condensate (3.7 mmbpd). It has approximately 0.23 mmbpd of spare capacity and less than 1% of the world’s proven reserves (13 billion barrels of oil). U.S. tight oil producers do not and cannot act together. Tight oil producers spend twice as much money as they make, and have 5 times more debt than annual revenue. It’s production costs are $65-$70 per barrel.

U.S. tight oil is on life-support at $35 per barrel oil prices.

OPEC is a swing producer. U.S. tight oil is not.

Truth vs. Confirmation Bias



In April 2015, Yergin told CNBC, “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”

What he meant was that over-production of U.S. tight oil helped cause the global price of oil to collapse in 2014, to swing down. It had nothing to do with really being the swing producer.

That was a few days before CERA Week, the pricey annual love-fest that Yergin’s company IHS throws in Houston for the oil and gas industry to feel good about itself. It was a clever-sounding trailer to publicize the $7,000-per-ticket event.

Later, in June 2015, Yergin told the Wall Street Journal that “now the U.S. is a swing producer, albeit an inadvertent swing producer as it didn’t set out to take that role.”

A swing producer cannot be inadvertent. A swing producer deliberately increases or decreases its production to balance the market, whether for short-term price advantage, or for demand stimulation and long-term price advantage and market-share.

Either Yergin doesn’t understand what a swing producer is or his swing-producer comments were manipulative and meant to support some agenda.

Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye.

Yergin said the U.S. was the new swing producer. What was heard was that America had made OPEC impotent. It was repeated enough by the press and other supposed experts that its truth was confirmed because people want to believe it–even though it is untrue.

Confirmation bias is the tendency to find support for our preconceptions. It may make us feel good but it is a poor basis for decisions. Investors beware.



Image from Imgur.