Thursday, 17 October 2013

Will the United States soon reach energy independence?

Two pieces of news this month show how quickly the United States is evolving its domestic energy industry. By early as next year the United States could become the world’s largest oil producer, overtaking Russia and Saudi Arabia and potentially transforming the global energy landscape, according to PIRA Energy Group.

However, the prospects of a new era of domestic American energy independence in which the US never have to rely on foreign sources ever again are probably overwrought.

Right now greater amounts of oil are being produced every day in the US, and in the near future there could be more oil coming out of America than there ever has been. The country’s oil production has increased by nearly 40% over just the past three years alone. Add into this mix Canada’s own increasing oil production and it is clear North America is now the world’s largest energy producer.

America now produces over 600 billion cubic metres of natural gas annually while Canada recently discovered a further 300-600 million barrels of oil deep in the cold waters off Newfoundland in the North Atlantic.

Following closely on this news, the US government announced that the United States has been overtaken by China as the world’s largest oil consumer. Ramping US domestic supply and evolving Chinese energy needs both contributed to the change in top spot. 

The evolution in the Chinese energy consumption comes from the increasing number of those who now drive their own passenger vehicles as the average wage increases in China. Although the ratio of cars to people in China is unlikely to match the US, economies of scale dictate that even minor fluctuations in Chinese car ownership will change how much oil they need to import.

While their economy shows signs of slowing - and probably won’t return to double-digit growth - China’s population will need more cars for many decades so oil imports will continue to rise in the world’s largest population.

The US Energy Information Administration said of the rapid energy boom that “this is a new era of thinking about market conditions...you wouldn’t in a million years have dreamed about”. And the benefits are certainly tangible for the American economy.

These increases in US oil production are not exactly a surprise. However, the predicted benefits of a boom, such as allowing the US to attain energy independence and lessen Washington’s focus on the Middle East, are likely to remain long term goals. They are by no means assured.

Russian energy major Gazprom publically believes the US shale “bubble” will soon burst. Some Russian think tanks suspect that Russia will be the big loser in the global market as the US ramp up energy production. But for now, as the US surges into the top spot of oil production, they return to a position they occupied only a few decades ago.

Thanks to a revolution in shale oil extraction technologies American shale oil output has leaped in the past six years with 10 million barrels per day (bpd) over just the last two quarters. This is the highest output level for the Americans for many years, and does not even include the rising levels of biofuels and other refinery gains. Estimates by the energy arm of the OECD predict US liquid fuel production will average 11 million bpd in 2014, whereas Russian output will likely only reach 10.86 million bpd for the same period.

The same OECD group described how the US growth should compensate for declining oil production and output in other countries and help cushion the oil price which might have otherwise risen higher than the current US$110 a barrel. Despite Saudi Arabia producing more oil over the past three months, the output rates are still lowering from many other important sources.

The greatest benefit to the United States will probably be to its bottom line due to the realities of global oil trade. America will still be attached to the global oil market, but the technology and eventual exports are going to create a robust industry even if the US cannot become 100% energy independent.

Self-sufficiently might still be something of a pipe-dream, but the US will ultimately be in a better economic position regardless. This is because all energy is not created equal. Energy can be split between two broad categories: transportation fuels and power generation.

Natural gas cannot yet be entirely swapped for the standard petroleum-based power for transportation, especially in personal vehicles. Ideally the growing production of oil in the US would help towards lowering petroleum and crude oil prices, which would bring down transportation costs. However, it is natural gas, drawn from enormous shale deposits, that is the major energy type currently experiencing a boom in the United States, rather than the crude oil necessary for transportation uses. The US is already self-sufficient in coal and is moving inexorably closer to the same goal with natural gas.

This is why domestic oil production - even with Canada factored in - is unlikely to reach the levels necessary to replace current American imports. So despite the huge finds of natural gas and oil, crude oil will remain as a staple import for the United States for many years to come.

On the other hand, that current shale gas and oil boom will fit nicely into the power generation category and help bring down the cost of heating and power generation, while lessening the reliance on other dirty fossil fuels such as coal for power.

It is true that the United States has flooded so much natural gas into the global market there are now fears of a glut, pushing down prices of natural gas, which in turn is forcing some drilling operations to close just as they are becoming more prolific and necessary.

Yet in the long run, while gas prices fall as a result of the glut, energy analysts suggest they should stabilise as demand moves to match production. The glut may disappear altogether over time as the prospect of continued low prices drives out marginal producers and as demand leaps higher when people switch to gas fuels to power more energy technologies and technological innovation opens more opportunity for natural gas usage.

It might not create self-sufficiency immediately, but American energy will directly impact the world market. Certainly, the numbers surrounding the United States’ new energy dominance are huge, and growing. The US may be able to stretch their exports and impact the global market with the potential to change the landscape for international energy dependence. The connection between energy and geopolitics is always robust, and in this case perturbations can be expected from rising US production.

But why isn't the price of natural gas more stable? The relative profusion of shale gas coming from the American drilling fields currently reflects oil’s stranglehold on transportation fuels and the low cost of production. Its long term future depends on significantly higher gas prices than where they presently sit. It remains to be seen how much natural gas those US fields truly possess and how long the current boom can last. Some high end estimates predict enough natural gas for 100 years from present fields, but more realistic and conservative figures put the time remaining at between 10 and 20 years.

Increased energy security can damper any effects of fluctuating markets, and the US will be more protected as the boom progresses. But America will still rely on other country’s oil for many years yet. Nevertheless, some foreign countries more than others will be keeping close tabs on the American energy revolution and will deeply appreciate an alternative energy supplier, which is where the true power of the American energy revolution arises.

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