Extreme weather and economic woes proved as disruptive for demand in 2011 as Middle East unrest did for supply. In Japan, the Fukushima nuclear disaster following the earthquake and tsunami disrupted both nuclear power generation and the broader economy, temporarily trimming energy demand as a whole but encouraging fuel switching to oil (as well as other fossil fuels) for power generation. In Europe, Greece's sovereign debt crisis raised concerns about financial contagion, the future of the euro and the region's economic recovery. Here too, headline events must be seen in perspective. While Japan recovered rapidly from the Fukushima disaster, the tragedy raised worldwide concerns about nuclear safety, bringing to the fore long-simmering questions about the industrialized world's aging nuclear fleet and the future of global electric power generation. Much of Japan's nuclear capacity remains idle, lifting utility demand for liquefied natural gas and, at the margin, oil. On the other hand, Europe's renewed economic woes served only to further reduce the liquid fuels share of demand of Organization for Economic Cooperation and Development (OECD) member countries relative to that of non-OECD economies. While the latter group has not yet overtaken the former as the largest liquid fuels consumer, the two came closer in 2011 than ever before and a crossover is likely to occur in the near future.
Whether supply- or demand- focused, the headline events of 2011¸ however momentous they were, should not overshadow other shifts, which may prove no less significant for U.S. and global oil markets. Last year's unusual patterns in benchmark crude pricing offer a powerful illustration of those shifts. Early in 2011, amid fast-rising crude oil production from the U.S. and Canadian midcontinent, prices for U.S. inland crude benchmark West Texas Intermediate (WTI) started to weaken significantly relative to those for broadly traded coastal or imported crude oil grades, such as Louisiana Light Sweet or North Sea Brent. WTI's discount had started to tighten by year's end, as pipeline and railroad companies took steps to move more stranded crude oil from inland U.S. markets to the Gulf Coast, yet remained unusually wide by historical standards.
In the United States and Canada, the production gains generated by technological advances, such as the combination of hydraulic fracturing and horizontal drilling, can hardly be overstated. Very preliminary data indicate that U.S. crude production increased significantly in 2011. Those increases are expected to continue in 2012 and to spread to other countries. Meanwhile, in Brazil, production is also slated to increase as advances in deepwater drilling unlock the country's vast subsalt resources. All together, the Americas accounted for the majority of non-OPEC crude production growth in 2011, and are expected to continue dominating non-OPEC supply growth over the next few years. As a consequence, oil markets in the Americas are becoming increasingly integrated and self-sufficient. Canadian oil sands and U.S. supplies are displacing U.S. imports from Europe, West Africa and, until recently, the Middle East - a trend that may gain momentum once logistical links are put in place to bypass current crude transportation bottlenecks in the midcontinent. At the same time, product exports from the United States to expanding markets to the south are growing rapidly, as discussed below.