Energy

American Petroleum Institute

Dean Foreman, Ph.D., Chief Economist

Recent price increases for petroleum fuels, natural gas, and virtually everything made from them remain daily considerations for consumers. And policymakers.

API’s latest Monthly Statistical Report (MSR) with primary data for November and Industry Outlook presentation for the fourth quarter of 2021 place the increased costs of fuels and everyday products in context with the global and U.S. economies as well as oil and natural gas market fundamentals.

The implications of this outlook are stark and suggest that either the economy gives way or energy markets could remain under pressure. With this insight, an important thing that helped lead to historically low U.S. energy prices for the past six years was an abundance of domestic production. Cogent energy policies that keep strong investments in U.S. energy production, infrastructure, refining, petrochemicals and manufacturing remain the most assured path to economic and national security.

Specifically, November data indicate that U.S. petroleum demand increased in total and across most refined products and was within 0.4% of its pre-COVID level (November 2019). To meet demand, refining activity accelerated to its highest capacity utilization rate in three months and, in the process, drew down crude oil inventories to their lowest level for November since 2014. Domestic crude oil production edged up by 0.1 million barrels per day (mb/d) to 11.6 mb/d, its highest since April 2020, but continued to trail the pace of demand recovery.

To be clear, demand essentially rebounded to its 2019 levels while supply has remained muted (for example, U.S. crude oil production is still down by about 1.5 mb/d compared with its highest levels in late 2019 and early 2020), which in turn has required drawing upon inventories and international markets.

To supplement domestic supplies, the U.S. was a petroleum net importer in November of 0.4 mb/d. This marked a reversal of the United States’ position as a petroleum net exporter both in November of 2019 and 2020. Notably, the U.S. Energy Information Administration (EIA) projects that U.S. crude oil net imports could grow by another 26% year on year or 0.9 mb/d in 2022, potentially leading the U.S. to be a petroleum net importer next year.

With demand having outpaced supply, crude oil inventories down, and imports increased, crude oil prices and therefore U.S. regular gasoline prices have been among their highest for November since 2012, per AAA – linked because crude oil remains the top input cost in making gasoline. Historically a combination of demand outstripping supply, lowered inventories and increased imports has been a recipe for upward pressure on prices for oil and natural gas.

Natural gas has plotted a different path – and one that has shown its markets remain highly regional and seasonal. U.S. consumers have been concerned by prices that more than doubled to nearly $6 per million Btu (mmBtu) in the fourth quarter of 2021, but recently pulled back to under $4 per mmBtu largely on expectations for a relatively warm winter coupled with inventories that caught up with historical norms during November. By contrast, Asian and European landed natural gas prices have exceeded $30 per mmBtu with no reprieve as U.S. prices pulled back.

This underscores that, despite the growth of the global natural gas trade, the prices across consuming regions have continued to differ. These prices have also remained highly seasonal, with the approach of winter having spurred unprecedentedly high international prices this year. A combination of strong Asian demand growth, relatively low Russian natural gas inventories, and underperformance of renewables in the European power sector could either spur the need for more liquefied natural gas or deter utilities from increasing their reliance on natural gas.

The path of global investments going forward will influence the outcome, and it is clear that a relatively fixed pool of capital is being spread among multiple competing energy sources. This important dynamic is shared across many industries impacted by the energy transition, and the effects it could have on price inflation, interest rates, and exchange rates may not have been fully reflected in projections for bullish economic growth through 2023.