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Energy Independence: Yes? No? And How?

September 26, 2016
Since the oil shocks of the 1970s, U.S. energy independence has been a goal of lawmakers, year after year. With the rise of hydraulic fracturing in the late 2000s, US production of natural gas rose to levels previously unseen, and crude oil production almost reached peak levels previously seen in 1970.[1] The “shale revolution” has dramatically altered the energy landscape.

By Kai Wang, ENG, W’18

The U.S. Energy Information Agency (EIA) predicts that the U.S. will be a net exporter of natural gas by 2017 and could be a net exporter of energy as early as 2019.[2] Net crude oil and petroleum product imports have fallen around 60% from their 2006 peak of 13 million barrels per day (bpd).[3] With energy independence a real possibility instead of a distant dream, it is important for the government to determine whether to launch initiatives to close the current gap or let the market pursue its path.

The first step in this process is to identify whether pursuing energy independence is actually worth it. In a 2012 survey of energy experts by Foreign Policy magazine, nearly two-thirds of the experts did not believe that the US would be energy independent or that independence was a sensible goal.[4] Common arguments for independence, such as decreasing US involvement in the Middle East, or economic security, have holes. Since the rest of the world and the global economy would likely still be dependent on Middle Eastern oil, the US would still be greatly impacted economically if oil suddenly stopped flowing to Asia and Europe.

Certain critics go further and argue that energy dependence have positive effects. Jason Bordoff, a former energy advisor to President Obama, asserted that the interconnectedness of the energy markets helped avoid shortages in the aftermath of Hurricanes Rita and Katrina, as well as during the 2002 and 2003 Venezuelan worker strikes.[5] Since the infrastructure was already in place for the US to import crude oil and petroleum products, other countries were able to immediately fill the gap posed by those events.

Furthermore, US energy production growth has already sent global crude oil prices plummeting from around $110 per barrel to below $50 per barrel. Continued US production growth would keep prices low and threaten the stability of nations such as Saudi Arabia and Russia, which depend on high prices to finance government spending and social welfare programs. In fact, Venezuela is currently facing an economic crisis with shortages of food and other basic commodities partially because of lower oil export revenues.[6] Fiscal crises in these nations have the potential to destabilize regions and drag down global markets.

Despite these negative aspects of energy independence, the perks are promising. Millions of new jobs are expected in the energy sector after prices recover.[7] Lower energy prices will stimulate new investment into manufacturing facilities and consumer spending.[7] Promoting strides towards energy independence have the potential to reinvigorate the US economy and create well-paying jobs for the millions of underemployed.

So what exactly could the US government do to promote energy production if it decided along this path? An obvious but controversial act could be to lift certain areas’ bans on fracking. Currently, fracking has been banned in New York, Vermont, and Maryland, and in individual municipalities and counties throughout the country. In June 2015, the Environmental Protection Agency published a report stating that they did not find fracking to have “widespread, systematic impacts on drinking water resources in the United States,” contrary to the beliefs of many environmentalists.[8] However, there have been multiple surface spills that contaminated groundwater in the Marcellus Shale region, which encompasses much of New York, Pennsylvania, West Virginia, and Ohio.[9]  

 

Source of US Petroleum Imports, Quarter One 2016

 

Other less controversial ways to promote energy production tend to be focused on renewable energies. In December 2015, Congress passed a bill that extended the production tax credits and investment tax credits for wind and solar energy, respectively. Another bill that has been brought up allows renewable energy generating companies to be structured as Master Limited Partnerships (MLPs) instead of just pipeline and energy transportation companies. MLPs combine the tax benefits of a limited partnership with the liquidity of publicly traded securities, and would significantly cheapen financing for renewable energy projects.

Lastly, another method of promoting energy production could involve retooling our current infrastructure from using petroleum products to other energy sources including natural gas and renewables. Currently, the main gap in energy independence exists with petroleum products. The US consumes around 19 million barrels per day (bpd), but only produces around 9 million bpd.[2] With Canada, Mexico, and stable nations (as defined by the Fragile States Index) supplying about 54% of US petroleum products imports in the first quarter of 2016, roughly a quarter of total US consumption comes from the Middle East or other relatively unstable regions. Furthermore, fuel oil for heating and energy generation accounts for about 15% of petroleum usage, which could potentially be replaced by domestically produced natural gas or renewable energy.[2] Because of this, the US could cut imports from politically unstable regions by 60% and significantly close the independence gap just by converting infrastructure, as expensive as it may be

The US has come a long way in terms of energy independence and it is finally within our grasp. Now, we must carefully consider its consequences and the ways we can reach it.

 

References

  [1]A. Sieminski, “Annual Energy Outlook 2016,” US Energy Information Administration, Jun. 28, 2016. http://www.eia.gov/pressroom/presentations/sieminski_06282016.pdf 

  [2]“Annual Energy Outlook 2015,” US Energy Information Administration, Apr. 2015. http://www.eia.gov/forecasts/archive/aeo15/

  [3] “U.S. Net Imports of Crude Oil and Petroleum Products,” US Energy Information Administration, Jun. 30, 2016.  https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mttntus2&f=m

  [4]D. Yergin, “How is Energy Remaking the World?” Foreign Policy, Jun. 18, 2012. http://foreignpolicy.com/2012/06/18/how-is-energy-remaking-the-world/

  [5] J. Bordoff, “Why the U.S. Should Not Want Energy Independence,” Wall Street Journal, Nov. 16, 2015.

http://blogs.wsj.com/experts/2015/11/16/why-the-u-s-should-not-want-energy-independence/

  [6] R. Gladstone, “How Venezuela Fell Into Crisis, and What Could Happen Next,” New York Times, May 27, 2016.

http://www.nytimes.com/2016/05/28/world/americas/venezuela-crisis-what-next.html

  [7] D. Yergin, “Congratulations, America. You’re (Almost) Energy Independent.” Politico, Nov. 2013.

http://www.politico.com/magazine/story/2013/11/congratulations-america-youre-almost-energy-independent-now-what-098985

  [8]“Assessment of the Potential Impacts of Hydraulic Fracturing for Oil and Gas on Drinking Water Resources,” U.S. Environmental Protection Agency, Jun. 2015. https://cfpub.epa.gov/ncea/hfstudy/recordisplay.cfm?deid=244651

  [9] S. McGraw, “Is Fracking Safe? The 10 Most Controversial Claims About Natural Gas Drilling,” Popular Mechanics, May 1, 2016. http://www.popularmechanics.com/science/energy/g161/top-10-myths-about-natural-gas-drilling-6386593/

  [10] “U.S. Imports by Country of Origin,” US Energy Information Administration, Jun. 30, 2016. https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm

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