The Case against US Energy Independence

Energy-related news at the close of 2012 was all about US energy independence, a goal of US presidents for decades.  It will not happen, and here is why. Global demand for energy along with relatively free markets will drive supplies of energy toward the area of growing demand.  That growing demand will put pressure on prices; the areas of growing demand will increasingly come from outside the United States.

But the case against US energy independence is not one against its value for our security and the benefits of uninterrupted supply so much as it is against the pragmatic reality of its likelihood in a global energy market.

Of course, increases in the supply of oil and natural gas, the growing availability of renewables, and improved efficiency in energy consumption have the capacity to mitigate the impact of increasing demand on price.  To the degree that an increasing supply of energy is able to offset demand for it, there is some possibility that the US may achieve its long sought after goal, but it remains unlikely.  Here is why.

US production of petroleum rose for the third consecutive year in 2012 to 8.7 million barrels a day, up from 7.5 million in 2010.  Net imports of petroleum have fallen by 29 percent over the same period (see Penley on Education and Energy: World Energy Outlook 2012).  Yet, the Department of Energy data on which this is based show that oil imports remain almost as high at 7.7 million barrels per day.  While there is still plenty of opportunity for oil-producing companies to find and produce more domestic oil, the difference between what the US consumes and what it produces is likely to still depend upon non-US supplies from major oil and gas companies that search for oil within and outside the US.

Moreover, the growing demand for energy in developing countries endures.  Right now readily available supplies of oil mean that prices have declined and remain steady.  None the less, the potential for increases in price and declines of reserves remains.  The Economist forecasts China’s growth in GDP per capita this year at a staggering 51% from US $6,890 to $10,410 (PPP).  With such tremendous growth anticipated in wages as well over the next three years, the potential for very increased demand for petroleum products is huge.  And the magnitude of the growth portends very significant increases in price without commensurate rises in available product.

US energy independence is not likely for reasons associated with the global, free market for energy and the rise in GDP from countries like China and India.  That market is a good thing for the US.  It has meant that we have been able to consume far more energy than we have produced domestically.  It means that we will be able to benefit in the future from our abundant natural gas supplies as global demand for energy grows and the US increases its exports of coal and natural gas.  Of course, all of this depends upon US and global political leadership that recognizes the value of healthy, profitable energy industry that is relatively unencumbered by restrictions on business.

Liquid Natural Gas and US Energy Exports

The potential for growth in US energy exports was evident in two recent but unrelated reports – one from Honeywell UOP and the other from the US Energy Administration.  Together the two link growing global demand for natural gas to technological advances that will increase US energy exports.

Honeywell UOP just announced a deal with Malaysia’s Petronas to collaborate on natural gas processing.  Natural gas is the fastest growing source of energy, and the US has abundant resources.  This blog has previously pointed out how natural gas resources in the US have the potential to make the US energy independent.  The partnership between Honeywell UOP and Petronas is focused on new technology that will make natural gas more easily shipped in its liquid form, commonly referred to as LNG – liquid natural gas.

The technology that Honeywell UOP and Petronas are working on will remove contaminants such as CO2 and mercury prior to the liquefaction of the natural gas.  The resulting product can be even more compressed in its liquid form, thereby increasing the capacity of a ship to move it to areas of global demand.  And that is where another recent report – this one from the US Energy Administration – makes clear why the Honeywell UOP-Petronas partnership really matters.

Earlier in the month, the US Energy Administration published its current analysis of Chinese energy demand.  China has sought to raise its imports of natural gas via pipeline and LNG.  Although natural gas still accounts for only 4% of China’s energy consumption, the China Offshore Oil Company has substantially increased its investment in natural gas.  The China Report states that the China Offshore Oil Company invested $12 billion of its total 2011 $18 billion investment in natural gas.

While natural gas imports in China represented 12% of the total in 2010, they rose to 22% in 2011.  The Chinese government has established a 2020 goal for natural gas consumption to rise from 4% to 10% of total energy use.  The potential for the US with its huge supplies of natural gas is evident.  And that is the reason the technological advances intended from the Honeywell UOP and Petronas collaboration really matter.  Lowering costs of transport will further the capacity of the US to meet global energy demands such as those in China, thereby increasing US GDP and helping to reverse the long trend of US imports exceeding our exports.