Keller-Heartt Blog: July 2014
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Fracking: for U.S. Energy Independence, Economic Stability and National Security

Hydraulic fracturing, also known as fracking, allows the extraction of oil and natural gas from deep rock formations 5,000-20,000 feet underground. It is a process of well stimulation that improves the flow of hydrocarbons into the well bore by increasing the permeability of the surrounding rock. Small fractures, usually less than 1.0 millimeter wide, are made in the rock formations with a pressurized liquid produced from water, sand and chemicals. Some veins and dikes are naturally occurring hydraulic fractures. This technique is commonly used for shale gas, tight gas, tight oil and coal seam gas. Tight oil, also known as shale oil or light tight oil (LTO), is light crude oil that comes from shale, tight sandstone or another low permeability formation.

Although hydraulic fracturing has been around since 1949, only in the last decade has it come into wider use, along with other advances in drilling technology such as horizontal drilling. These valuable reserves are now commercially viable, changing America's energy outlook for the better. Oil production, which was on the decline from 1980 onward, has been increasing annually since 2010, attributable to new drilling techniques and fracking.

What fracking means for America's energy independency, economic stability and national security is profound.

It provides the U.S. with energy security.  Fracking techniques can produce oil and natural gas where conventional technologies are not effective. Previously, there were many oil and natural gas reserves that were difficult to tap, due to the low permeability and porousness of the shale, a problem which is addressed in fracking technology. The very large supplies of oil and gas that are available from dense shale deposits will enable the U.S. to generate electricity, heat homes and power vehicles into the foreseeable future. The U.S. Energy Information Agency reports that more than 750 trillion cubic feet of technically recoverable shale gas and 24 billion barrels of recoverable shale oil currently exist in geographical areas where companies are actively engaged. These locations, called "plays," are in the Mountain States of the West, the South and throughout the Appalachian Basin in the Northeastern U.S.

It's good for the economy. The fracking industry generates direct economic benefit in the form of royalty payments to property owners, government tax revenues and high-paying jobs. These new jobs cover a wide range of industries that include surveying and engineering, construction, equipment manufacturing, hospitality and environmental permitting. Indirect economic effects include higher land prices in fracking regions and a boost for those local economies. A study conducted in 2013 by the Manhattan Institute for Policy Research, "The Economic Effects of Hydrofracturing on Local Economies: A Comparison of New York & Pennsylvania," showed that fracking can bring significant financial benefit to rural communities. As reported by the U.S. News & World Report in their article, "Fracking Our Way to Higher Incomes," per-capita income rose by 19 percent in Pennsylvania counties that had more than 200 hydrofractured wells, compared with just 8 percent in counties without any wells. Other states in the country that have fracking operations, such as Texas, Oklahoma and North Dakota, are also part of the financial success story seen with hydrofracturing. A separate study by IHS CERA (Cambridge Energy Research Associates) was reported on by Bloomberg Businessweek in their article, "Fracking Boom Seen Raising Household Incomes by $1,200." This report illustrates how hydraulic fracturing is lowering energy costs and lifting family incomes.
It makes the U.S. less dependent on foreign oil. In 2012, about 57 percent of crude oil being processed in U.S. refineries was imported. Although the largest of these importers was Canada, the U.S. also receives oil from Middle Eastern countries such as Saudi Arabia, Iran, Iraq and the United Arab Emirates. This requires an ongoing relationship with historically unsettled regions and adds another layer of complexity to America's response to geopolitical skirmishes.

Fracking for natural gas is good business and reduces carbon emissions. On the natural gas side of fracking, the U.S. would not only become self-sufficient in their natural gas needs, but could also become a major exporter, further boosting the economy. Gas used in the place of coal to generate electricity will greatly reduce carbon emissions, which have been shown to contribute to global warming.

Supporting the good economic news of fracking is a recent decision by the U.S. Commerce Department to ease the way of U.S. oil exports. As reported by Bloomberg News in their article, "U.S. widens exports for shale oil," this lessens the impact of a 40-year-old law banning most overseas petroleum shipments. They've widened their definition of an eligible refined product that can be shipped to overseas customers. This means that oil from U.S. shale formations, after some additional processing, may be eligible for export. This recent news makes the future even brighter for
hydraulic fracturing and homegrown American oil.


The State of Oil Reserves Worldwide

Oil is vital for the functioning of industrialized nations. It powers our cars, heats our homes, and plays an important role in the production of synthetic materials and textiles. According to a 2012 report from UBS, there are 1.38 trillion barrels left in global oil reserves, which should last another 46.2 years.

But where are these reserves located and just how much oil is available in the United States?

The United States currently ranks 12th in the world for largest oil reserves, with 31 billion barrels that are consumed at a rate of 18 million barrels, daily. At this rate, US reserves will last another 11.3 years.

The 10 most oil rich states are Louisiana, Colorado, Utah, Wyoming, New Mexico, Oklahoma, North Dakota, California, Alaska, and Texas, with Texas having the most oil reserves.

In Texas, there are currently 27 oil refineries and as of 2011, 7,014 million barrels of oil reserves. In 2010 alone, 32 new oil fields were discovered in the Lone Star state.

Alaska ranks second in terms of oil reserves with nearly 3,816 million barrels of oil reserves in 2011. About 11.9 percent of the state's workers are employed by the oil and gas extraction industry.

California is number 3 with 3,005 million barrels of proved oil reserves in 2011 and 16 oil refineries. In 2013, it was discovered that Monterrey shale oil deposits would soon be accessible in Southern California, which could create between 512,000 to 2.8 million jobs in the state. If extraction does occur, California could soon surpass Texas in oil production.

In other parts of the world, there are large oil reserves as well. Saudi Arabia currently ranks number 1, with 265 billion barrels of oil or 19.1 percent of the world supply, which would last the country another 72.4 years. Venezuela comes in at a close second with 211 billion barrels of oil or, 15.3 percent of the world's supply, which according to their lower consumption rate, would last the country another 234.1 years.

Iran currently has 137 billion barrels of oil (9.9 percent of the world supply) and at their rate of usage, is expected to last another 88.4 years.

Iraq is number 4 in the world for largest oil reserves, with 115 billion barrels left and roughly 8.3 percent of the world supply. Using 2.7 million barrels daily, their supply should last another 128.1 years.

Finally, Kuwait ranks 5th in the world for largest oil reserves; containing 102 billion barrels or roughly, 7.3 percent of the world supply. With a consumption rate of 2.75 million barrels daily, their reserves should last another 110.9 years.

What is important to think about first and foremost is the quality of these different oils from different parts of the world. The countries with the largest oil reserves on a global level are also largely part of the OPEC Basket classification of Crude Oil, which known for higher sulfur content and heavier viscosity- attributes which come at a lesser value compared to Brent Blend and WTI from Europe and North America.

If our oil reserves on a global level are to last and be utilized, however, more efficiency in oil extraction and refinement of lesser oil types like that of OPEC Basket oil might be something worthwhile to pursue. If the United States current oil reserves are only set to last another 11.3 years, this could be very problematic for its economy and thus action must be taken.
Another issue at play here is the increased demand for oil in recent years from developing nations who are not currently members of the OECD (Organization for Economic Cooperation and Development.) China, for instance, has experienced an incredible surge in economic growth over the last decade. For transportation alone, China will double its demand for oil within the next 15 years as the number of Chinese citizens driving motor vehicles is quintupled.  By 2020, China may be importing up to 63 percent of its oil. But where will that oil come from?
China has been on the offensive with developing relationships with oil rich territories like Sudan, Angola, and Gabon. While these areas are politically volatile, China has been using diplomacy, loans, and other measures to cultivate relationships with these oil suppliers, protecting future interests.
As mentioned previously, the greatest consumer of oil in the world is the United States. To protect its interests, the US began stockpiling oil in 1975 in case of emergency. The oil is currently stored in large, underground caverns in Louisiana and Texas. In 1985, the reserves were enough to last 118 days. However, due to increase in demand and consistent disruptions in global supplies, the reserve as of 2012, would only last 80 days.
The reserves in the United States are only put into effect when absolutely necessary because being the world’s greatest oil consumer; markets would be greatly affected if the U.S. was to rely solely only its reserve supply, even if for a short time.
While Saudi Arabia has the largest oil reserves in the world, its value has been corroded by its inability in recent years to keep up with demand in terms of production and refinement. In 2005, a $50 billion investment was made to bring production up to speed over the course of four years, to keep up with rising oil demand. While countries in the Middle East are rich with raw materials, they often lack the infrastructure to make the most of these raw materials through advanced production techniques.
As our need for oil grows, alternative technologies for obtaining it are being developed. One of the most promising North American locations is the Canadian Tar Sands in Alberta. The sands contain billions of barrels of oil.

What Makes Each Type of Oil Unique?

Courtesy Sergio Russo & Flickr
Out of all the raw materials used by industrialized nations, crude oil is no doubt the most important. It is used to fuel cars and airplanes, to produce heat, and to operate machinery. Even household items like DVDs, sofas, and clothing contain oil due to its role in the production of synthetic materials. In a single day, the world consumes 14 billion liters of oil. It fuels our world.

Despite popular misconceptions, not all crude oil is created equal. There are over 160 different types of oil on the market all varying in terms of geography, API gravity, sulfur content and more.

When discussing oil, it is important to have a grasp on these varying characteristics, the first being viscosity. Viscosity relates to oil’s inability to flow. Oil with a high viscosity is harder to pump and thus makes extraction and refining processes more difficult.

Volatility refers to how fast oil evaporates. Oil with a high volatility rate must be handled with extra care so as to prevent loss of oil. Regulation of temperature and sealing procedures are often utilized.

Toxicity describes how dangerous particular oil is to humans and local wildlife. In the case of a spill, cleanup processes differ depending on the type of oil.

As previously mentioned, oil can vary from being very light to being very thick. The four primary categories of oil are: Very Light Oils/ Light Distillates, Light Oils/Middle Distillates, Medium Oils, and Heavy Fuel Oils. They are further described below.

Courtesy Tom Russel & Flickr
Very Light Oils/Light Distillates include Jet Fuel, Kerosene, and Gasoline, They have a high volatility rate which makes there toxicity level lower.

 Light Oils/Middle Distillates include Grade 1 and 2 Fuel Oils and Diesel Fuel. They evaporate less quickly than Very Light Oils and are thus slightly more toxic to the environment.

Medium Oils are the most common crude oil on the market. Possessing a much lower volatility rate than the above two categories, their clean- up in the case of a spill can be quite complex.

Heavy Fuel Oils account for Grade 3,4,5, and 6 Fuel Oils and Heavy/Intermediate Marine Fuels.

Out of the 160 different types of oil traded on the market, the most talked about are West Texas Intermediate, Brent Blend, and OPEC Basket. Their variations in weight and sulfur content impact their value and price per barrel, although prices can be impacted by other factors as well, including political and logistical.

1. West Texas Intermediate (WTI)
Perhaps the highest quality Crude Oil on the market is West Texas Intermediate or WTI, the U.S. benchmark for crude oil. It is mainly refined in the Midwest and Gulf Coast regions, which is perfect for the largest gasoline-consuming country in the world. WTI is considered a "light" crude oil due to its API gravity of 39.6 degrees. API gravity is defined as the "American Petroleum Institute Gravity" which measures how light or heavy a crude oil is compared to water. An API gravity that is greater is lighter than water and thus, would float. An API gravity that is less than 10 is heavier than water and would sink.

WTI is also considered to be a "sweet" crude oil due to its low sulfur content of 0.24 percent. The lower the sulfur content, the sweeter the oil. The higher the sulfur content, the more "sour" the oil.

The premium characteristics of WTI used to make its worth higher than those of other oils, priced $1- $2 higher per barrel than "Brent Blend Oils" and $5-$7 higher than "OPEC Basket Oils." However, in April 2007, Bloomberg reported that WTI was no longer a good benchmark for worldwide oil prices. It began trading lower than Brent Blend, priced at $63.58/ barrel versus $71.39 per barrel. There was a temporary shortage of refining capabilities which could have accounted for the price drop. As of 2014, Brent Blend still trades for $14 higher per barrel than WTI despite being not as light and not as sweet.

2. Brent Blend
This type of Crude Oil is actually a blend from 15 different oil fields located in the North Sea's Scottish Brent and Ninian systems and serves as a benchmark for 2/3 of crude oils traded internationally. It includes Brent Blend, Forties Blend, Oseberg, and Ekofisk crudes. It originally was produced from the Brent oil field and the name "Brent" came from a naming policy that labeled all of its fields after birds, in this case, the Brent Goose. Brent is also an acronym for the oil field's formation layers: BroomoseBerg, Rannoch, Etive, Ness, and Tarbert. It is excellent for making gasoline and is consumed largely in Northwest Europe, where it is mostly refined. While it is very high-quality oil, it has an API of 38.3 degrees which still makes it a "light" crude oil but not as light as WTI. Brent Blend also contains 0.37 percent sulfur which defines it as a "sweet" crude oil, but not as sweet as WTI. Still, it is often priced at $4 above the OPEC Basket price.

3. OPEC Basket
This oil comes from a collective of twelve different oil types from Algeria, Saudi Arabia, Indonesia, Nigeria, Dubai, Venezuela, and the Mexican Isthmus. These include: Saharan Blend (from Algeria), Ecuador, Iran Heavy (from Islamic Republic of Iran), Basra Light (from Iraq), Kuwait Export (from Kuwait), Es Sider (from Libya), Bonny Light (from Nigeria), Qatar Marine (from Qatar), Arab Light (from Saudi Arabia), Murban (from UAE), BCF 17 (from Venezuela), and Girassol (from Angola).

OPEC stands for Organization of Petroleum- Exporting Countries, formed in 1960 to help regulate policy for the production and sale of oil in its domain.

OPEC Oil tends to have a much greater amount of sulfur within its unrefined state, and is largely considered to be sour. It also is much heavier than WTI or Brent Blend. These factors make OPEC Basket Oil much lower in value compared to WTI or Brent Blend.