As the United States finds itself with abundant natural gas supply and growing domestic oil production, the phrase ‘energy independence’ has become the new buzzword of politicians and oil and gas industry officials.
According to a recent Raymond James report, the United States could achieve energy independence by the end of the decade, Dow Jones reported in early April.
But can the United States truly become energy independent?
In the short to medium term outlook for oil, the United States effectively has no chance of becoming energy independent, said Dr. Michael Noel, senior vice president of Edgeworth Economics.
“Right now, we import so much oil because it’s cheaper to do so,” Noel said. “To forego a cheaper source of oil and replace it with a necessarily more expensive source generally does not make economic sense.”
The argument for energy independence implies that the Unites States should always pay a premium on energy to avoid Middle East oil instead of just a premium when price shocks coming from the Middle East cause price spikes in the United States.
“It’s an expensive insurance policy and that’s why we still use Middle East oil,” Dr. Noel commented, adding that, as long as the United States uses oil to a certain degree, the United States will always be subject to global oil shocks.
Currently, 20 percent of oil imported by the United States comes from the Middle East and 40 percent from OPEC member countries. Canadian oil comprises 20 percent of U.S. imports and is expected to keep growing. Ten percent of U.S. oil imports come from Mexico; the amount of oil imported continues to fall.
Even if the United States imported all of its oil from friendly countries such as Canada, a supply cut in the Middle East would mean customers in this region would need to source oil from somewhere else, bidding up the price of oil and drawing supply from Canada and other friendly countries. As a result, U.S. customers would be impacted with higher prices.
“The domestic price of oil will reflect the world price of oil, so thinking that more domestic drilling will bring domestic oil prices down is a bit naïve,” said John Z. Wetmore, producer for “Perils for Pedestrians” Television, a television series that examines the issues affecting people who walk.
Additionally, the faster the United States pumps its domestic reserves out of the ground, the sooner it will exhaust them and be even more dependent on foreign supplies, Wetmore commented in a statement.
Assertions by some politicians that U.S. energy independence means the U.S. will not have to send its troops over to the Middle East are not accurate, given the United States support of Israel.
“There is still going to be some involvement, given that a number of Muslim countries don’t like its existence,” Noel said.
“Energy independence doesn’t mean we’ll abandon our friends and allies around the world,” said Mike Amman, a Florida-based business finance and technology consultant. “Isolationism isn’t the answer, we’re joined at the hip (or at the wellhead) to the rest of the world, like it or not.”
The outlook is not good for cheap gasoline, given worldwide demand for oil. Wetmore noted that China is now a larger automobile market than the United States and India.
Other countries are trying hard to catch up with United States’ driving habits, Wetmore commented.
“Four dollars will look cheap when the world economy recovers,” said Wetmore. “It would all be more tolerable if we designed our cities and towns with more transportation choices, so we didn’t have to burn gasoline every time we made any trip for any purpose.”
Chris Nelder, an energy expert who has written numerous articles in the topic of Peak Oil, said that existing data doesn’t support the idea of the United States being energy independent.
Nelder questions whether production forecasts for unconventional oil plays such as the Bakken are feasible, and notes that Mexico’s production has been in long term decline.
While tight oil wells have huge initial production rates, they decline sharply in six months times. Tight oil production will also not work with lower oil prices.
“To be energy independent, we would have to produce about 9 million barrels of oil per day (bopd) from wells that give you 100 bopd,” Nelder noted, adding that oil prices need to stay above at least $85 per barrel to sustain production.
However, higher oil prices have also bolstered gasoline prices, and as U.S. consumers struggle with $4/gallon prices, they start to drive less, which kills demand. Oil production needs to remain on a narrow ledge to keep production flowing, and the incredible price swings to above $100 and below $85 impact supply.
“In that narrow band, do we really think it’s possible that for another decade we can drill thousands and thousands of wells?” said Nelder.
To keep output flat, the U.S. would have to draw down its oil resources more quickly, Nelder commented.. By 2030 and 2040, over two-thirds of the world’s oil fields will be in terminal decline. At that time, the United States will face difficulties in importing oil from anywhere.
“From that point, we’re going to need our domestic resources,” said Nelder. “We could actually be shooting ourselves by trying to achieve energy independence.”
Promise of Natural Gas?
The United States already is energy independent in natural gas, said ConocoPhillips Chairman and CEO James Mulva at a recent conference.
Energy industry leaders such as T. Boone Pickens and Robert Hefner are calling for greater use of natural gas in the United States in transportation.
Nelder thinks that T. Boone Picken’s plan to convert fleet vehicles to run on compressed natural gas makes a lot of sense, but worries that the deluge of natural gas that as resulted from the shale gas rush means that no companies can make money on natural gas.
The land rush mentality that ensued since late 2010 resulted in companies buying up a number of properties and drilling. A lot of gas is being flared, and plans have been proposed to convert liquefied natural gas import terminals constructed in the United States into export terminals.
Nelder said he thinks that the United States shouldn’t get crazy about exporting LNG until the United States really knows what it has in terms of supply, noting that the 100 years of natural gas supply in the United States hasn’t been proven and is highly speculative.
The United States already uses gas that is the equivalent of 11 million barrels of oil per day and faces the serious risk of finding itself faced with very expensive gas if gas use increases and LNG is exported.
A number of shale gas producers such as Chesapeake Energy have taken on a lot debt to acquire shale gas properties, thinking they can flip the leases. But these companies face the real possibility of going bankrupt when buyers start to question whether the can profitably produce gas, Nelder noted.