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.

US Energy Independence

This past week has produced more political discussion of America’s capacity to achieve what has seemed very challenging – energy independence.  Mr. Romney, like so many presidential candidates before him, has declared a goal for America of energy independence.  And like so many others in the past, this achievement might have seemed doubtful and unrealistic.

But times are different.   And those differences are evident in the earlier report from Citi GPS – Energy 2020: North America the New Middle East?.  US oil output is up 23% over four years ago, and the U. S. has become a net exporter of petroleum products.  Oil production alone is up 7% since the end of 2010.  The Citi GPS report forecasts that current US trends in oil production will lead to a rise from 7.3 million barrels of oil per day in 2009 to 15.6 by 2020, based upon an evident trend in the 9 million for 2011.  Technology developments and higher prices have driven the change in supply.

Already, we are seeing some change to the Obama administration’s regulatory permitting that has previously limited growth in off-shore sources.  With continued progress on permitting and licensing available retained earnings of large oil companies will drive renewed investment.  This, too, will add to the oil supply from US sources and contribute to the likely forecast for 2015 and later.  Some forecast that Mr. Obama may become only the third president in US history to have seen an increase in the domestic oil supply during his presidency.

But it has been the startling shift in availability of natural gas that has mattered so much to the likelihood that Mr. Romney will be correct about the US future of oil independence.  With new technology, including fracking technology and horizontal drilling, the growth in natural gas is also supportive of Mr. Romney’s plan, and its known, potential growth is even greater.  The same report already mentioned forecasts that natural gas supply from the lower 48 states could grow by 22 – 29% by 2020, based upon current growth trends.  It is fracking from shale beds that have provided this capacity.

Risks to our capacity to continue to increase the availability of US natural gas are primarily bound up in regulatory policy.  From federal sources, we have still seen only limited regulation that would tend to stifle our capacity to increase the supply of natural gas from fracking.  Nevertheless, new rules are under consideration, and I have written about the EPA’s related, questionable research in a previous blog – see The EPA and Good Science?  State policy as well has the potential to limit supply in unpredictable ways.

New discussion of energy independence is a good thing, and the very good news in it is that our future seems very bright whichever candidate becomes our next president – so long as regulation does not unnecessarily stifle the growth in the supply of oil and natural gas.