How the U.S. Oil and Gas Industry Works

Introduction

Soaring energy prices in 2022 added fuel to the U.S. debate over the future of oil and natural gas, energy independence, and the fight against climate change. Some observers call for maintaining high production of these fossil fuels, while others urge the Joe Biden administration to keep its commitments to reduce greenhouse gas emissions and transition to renewable energy.

In recent years, the United States has reclaimed its position as the world’s largest producer of oil and gas. But the price of oil is still determined by global consumer demand and the output of other major producers, including Saudi Arabia and Russia. Analysts say U.S. energy policy is at an inflection point that will have global economic, climate, and health consequences.

How are oil and gas produced?

Oil is also referred to as crude oil or petroleum, while natural gas is more accurately described as fossil gas or methane. (Though it is colloquially referred to as gas, gasoline for cars is a liquid product derived from oil.) Oil and gas, as well as coal, are fossil fuels because they are formed underground over millions of years from the remains of plants and animals. Both are made up of hydrocarbons, molecules of carbon and hydrogen. 

The conventional process for extracting oil and gas involves vertically drilling a well into an underground reservoir. Such wells have operated in the United States since the mid-1800s. Today, most U.S. production comes from unconventional oil drilling because conventional deposits have been largely tapped. The combination of horizontal drilling and hydraulic fracturing (fracking) that took off in the early 2000s has allowed oil producers to unlock previously inaccessible stores. In the process, millions of gallons of water, sand, and chemicals are pumped into wells deep underground, creating fissures in the surrounding shale rock and releasing the trapped oil and gas. This “shale revolution” dramatically increased U.S. oil and gas production.

Also, new technologies have enabled companies to increase offshore oil and gas extraction, which requires drilling at great depth underwater. Still, offshore drilling accounts for a relatively small share of total U.S. oil production, at about 15 percent in 2021 according to the U.S. Energy Information Administration (EIA), and a negligible share of natural gas production. Most offshore drilling in the United States takes place in the Gulf of Mexico.

After extraction, oil and gas are further processed before being sold to customers. Oil is refined into gasoline and diesel for vehicles, jet fuel, and petrochemicals, which are used for manufacturing a range of products [PDF] including plastics and fertilizers. Natural gas is processed to remove petrochemicals and impurities, and the resulting “dry” gas is shipped via pipelines or cooled to form liquefied natural gas (LNG), which can be transported by ocean-going tankers. Gas is used mainly for electricity, heat, and industrial production.

How is the U.S. oil and gas industry organized?

It is made up of a range of companies. Chevron and ExxonMobil are the biggest U.S.-based firms. United Kingdom–based BP and Shell are also dominant within the United States. There are a variety of smaller firms that specialize in one part of the production process—exploration and extraction, transportation, or refining. Other major U.S. companies are ConocoPhillips, Devon Energy, EOG Resources, Marathon Petroleum, Occidental Petroleum, and Valero Energy.

The industry struggled over the past decade as its overinvestment in fracking contributed to a global glut of oil and gas, depressing prices. In early 2020, global energy prices collapsed as COVID-19 pandemic restrictions choked off demand. However, the U.S. government granted companies billions of dollars in tax benefits as part of a massive fiscal stimulus program, and by 2022, the industry was banking hefty profits as the economy recovered and prices soared amid Russia’s war in Ukraine.

How much does the United States produce?

The United States has been among the world’s energy giants since the first oil well was drilled in Pennsylvania in 1859. But oil production peaked around 1970 and then waned for decades until the fracking boom in the early 2000s. Researchers estimate that the United States now produces 75 percent of its crude oil supply and 90 percent of its natural gas supply domestically. By 2021, it was producing about eleven million barrels of crude oil per day and around one hundred billion cubic feet of gas per day. 

The United States became the world’s top producer of oil in 2018, when it surpassed Saudi Arabia. It became a net exporter of petroleum products in 2020, five years after Congress lifted a decades-long ban on oil exports. Canada is a top destination for U.S. oil, along with China, India, Mexico, the Netherlands, and South Korea.

Yet, the United States continues to import certain types of oil because it lacks the capacity to refine all the crude oil it produces into fuels such as gasoline and diesel. It produces mostly light (low-density), sweet (low-sulfur) oil, but many refineries that predate the fracking boom are designed to process imported heavy, sour oil. As a result, companies continue to import these oils to utilize their refining infrastructure. In 2021, the United States imported an average of six million barrels of crude oil per day. Canada now accounts for more than half of U.S. oil imports, replacing the Organization of the Petroleum Exporting Countries (OPEC) as the top source over the past decade.

The United States has been the world’s top producer of natural gas since 2011, when it overtook Russia, and it has been a net exporter since 2017. About half of the gas it exports is sent by pipeline to Canada or Mexico, but increasingly it has exported LNG by sea. By mid-2022, the United States became the world’s top exporter of LNG, boosting supply to Europe as countries sought to transition away from Russian energy.

What’s the debate over energy independence?

The debate over U.S. energy independence has shifted in focus over the decades, shaped by changes in geopolitics, technological advances, and growing concerns about climate change.

Much of the debate in the last decades of the twentieth century centered on the strategic risks of U.S. dependence on foreign oil. Energy crises, such as the 1973 oil embargo, demonstrated how quickly external price shocks could throw the U.S. economy and political leadership into turmoil. In response, politicians called for the United States to ramp up domestic production to meet its needs and improve its energy security. Proponents of achieving energy independence also argued that relying on energy imports undercut U.S. foreign policy because it forced many administrations to keep commercial relationships with some undemocratic oil-rich countries.

Today, some U.S. lawmakers point to high gasoline prices amid the war in Ukraine as a reason to boost fossil fuel production and restrict exports. But analysts say that because oil is a globally traded commodity, there is little that the United States can do to control prices. They also question whether trying to achieve self-reliance on fossil fuels is even desirable. “Energy self-sufficiency may seem like a route to security, but it would be highly inefficient and impose unnecessary costs,” Columbia University’s Jason Bordoff and Harvard University’s Meghan L. O’Sullivan write for Foreign Affairs. For example, the United States often relies more on oil imports when major hurricanes hit the Gulf coast, where much of the United States’ energy resources are located.

Renewable energy sources, such as solar and wind power, are increasingly part of the debate. Experts say that boosting capacity for renewables would help the United States achieve greater energy security. “We need to accelerate the clean energy transition. That’s what will give us real energy independence,” says the Environmental Defense Fund’s Mark Brownstein.

What role does the U.S. government play in shaping the industry?

The oil and gas industry is governed by a patchwork of federal and state rules. At the federal level, multiple agencies regulate different aspects of production. The Bureau of Land Management leases federal lands for drilling; about 90 percent of the lands it manages is open to such leasing. The Federal Energy Regulatory Commission oversees the interstate transportation of oil and gas. The Environmental Protection Agency (EPA) regulates pollution caused by oil and gas production under authority granted by the Clean Air Act, the Clean Water Act, and the Safe Drinking Water Act. Federal fuel-efficiency standards for vehicles also influence demand for oil.

At the same time, the federal government incentivizes production by providing billions of dollars in subsidies to the industry every year, mainly through tax breaks. It also taxes consumers for the purchase of gasoline and diesel (at 18 and 24 cents per gallon, respectively) to fund highway maintenance.

Additionally, the government can influence the supply of oil through the Strategic Petroleum Reserve (SPR), a stockpile that can hold more than seven hundred million barrels. In March 2022, President Biden authorized the largest-ever release from the reserve—one million barrels per day for six months—in an attempt to lower prices. Some analysts suggest using the SPR as a tool to smooth the boom-bust cycles of oil production and manage the transition to renewables. 

What is the impact on global temperatures?

Producing and burning oil and gas create almost half of the world’s greenhouse gas emissions, mainly carbon dioxide and methane. Greenhouse gases trap heat and cause temperatures to rise, which contributes to stronger storms; increasingly extreme heatwaves, droughts, and floods; and other environmental catastrophes.

The United States is the world’s largest emitter historically and second-largest emitter today, behind China. Oil and gas account for nearly 80 percent of the country’s total carbon dioxide emissions and more than a quarter of total methane emissions [PDF].  

According to a 2018 report by a panel of top climate researchers, global emissions need to decline by 45 percent by 2030 to limit warming to 1.5°C (2.7°F) above preindustrial levels, which is the aim of the Paris Agreement on climate. Surpassing that limit will cause irreparable harm, and every additional tenth of a degree of warming worsens the damage. In 2022, the same panel said that some regions are already seeing irreversible damage and that the 1.5°C goal is almost out of reach.

The Biden administration has pledged that the United States will halve its emissions, compared to 2005 levels, by 2030 and achieve net-zero emissions by 2050. But to have a shot at achieving those goals, the oil and gas industry, as well as electricity providers and automotive firms, needs to reduce emissions immediately. Oil and gas consumption has to decline by at least 56 percent by 2050 compared to 2020 levels, according to Princeton University’s Net-Zero America study. Actions that companies can take include increasing energy efficiency; improving methane leak detection; developing carbon capture, utilization, and storage (CCUS) technology; investing in renewables; and, ultimately, leaving hydrocarbons in the ground.

What are other consequences of using oil and gas?

Burning oil and gas in the United States contributes to climate change and therefore has global consequences. Climate change displaces millions of people from their homes and kills tens of thousands of people [PDF] worldwide every year. It increases the spread of diseases and weakens food security, among other consequences. The economic costs are likewise immense: A 2022 report by the consulting firm Deloitte predicted that taking no climate action will cost the global economy $178 trillion over the next fifty years. That is more than a third of the wealth that exists today. 

There are also domestic consequences of finding, producing, and transporting oil and gas. For example, the industry is a large source of the country’s air pollution. Researchers in many states have found that oil and gas workers—and the estimated seventeen million Americans who live within a half mile of production sites—are more likely to suffer health problems such as asthma and cancer. Many of these sites are located near Indigenous or minority communities. 

In addition, hundreds of thousands of gallons of oil are spilled into U.S. waterways and oceans every year, killing plants and animals and damaging ecosystems. Spills happen in a variety of ways, such as collisions, as was the case with the Exxon Valdez tanker in 1989, and explosions, as on the BP Deepwater Horizon drilling platform in 2010. Fracking, in particular, can contaminate water resources [PDF] and contribute to earthquakes. 

What’s next for the U.S. oil and gas industry?

The EIA predicts that without major policy changes, U.S. oil and gas production will remain at high levels through 2050. That is despite warnings from climate scientists and despite international agreements that encourage an immediate transition to renewable energy sources.

Some of the challenges are political. “We can do a whole lot more decarbonization than we are doing, but the problems that are holding us up are political,” says the Brookings Institution’s Samantha Gross. Most U.S. lawmakers now agree that climate change is a scientific fact; but many Republicans have opposed the Biden administration’s proposed climate legislation, arguing that the transition will hurt the economy and put the United States at a disadvantage internationally. Moreover, oil and gas companies have for decades downplayed the dangers of climate change and spent millions of dollars lobbying Congress on these issues. Companies are increasingly being targeted by lawsuits that seek to hold them accountable for misleading the public on climate change. 

Higher energy prices caused by global shocks also pose hurdles for a transition. Following Russia’s invasion, the Biden administration pressed oil refiners to expand capacity and considered a gas-tax holiday. In addition, companies boosted LNG exports to Europe and made plans to construct new infrastructure that is expected to lock in greenhouse gas emissions for decades.

Most experts say that the energy transition will be difficult as long as demand for oil and gas remains high and companies continue to reap hefty profits from extracting hydrocarbons. Those who support a rapid pivot from fossil fuels say governments should take a much more assertive role. “Without government intervention, tailored and restrained but nonetheless increased, the world will suffer a breakdown in energy security or the worst effects of climate change—or both,” write Bordoff and O’Sullivan for Foreign Affairs.