Energy Independence—What Then?
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In a series of posts from RFF’s blog, Common Resources, Joel Darmstadter and Roger Sedjo consider the significance of achieving energy independence in the United States.
“By around 2020, the United States is projected to become the [world’s] largest oil producer”—so states the International Energy Agency in its World Energy Outlook 2012, issued November 12 and quickly echoed by media around the world. In the process, the United States is expected to overtake Saudi Arabia in that lead role and, coupled with Canada and its burgeoning oil sands output, is likely to ensure North America becoming “a net oil exporter around 2030.”
Thus, the long-cherished goal—especially in the political domain—of US oil self-sufficiency may, before too many years, provide the missing link in the country’s energy profile. That said, the implication of zero oil imports may not represent the unalloyed blessing for the US economy that it is often, and reflexively, portrayed to be.
Zero Oil Imports: Benefits and Lurking Uncertainties
Zero US oil imports—a goal of various US administrations since at least the Nixon era—promise to relieve, at least to some extent, security concerns associated with dependence on foreign oil sources. Additionally, the pure economic benefits to America are likely to be substantial. However, environmental and geopolitical concerns will create uncertainties that confound political decisionmaking.
Projections of US oil independence are largely the result of new technologies— particularly hydraulic fracturing (“fracking”)— which, already dramatized by the enormous expansion of natural gas supplies in recent years, make huge oil resources previously locked in shale deposits accessible at costs competitive with world oil market prices. Continued improvements in energy efficiency are a contributing factor in these projections. An implication of this turn of events is that production-decline predictions of “peak oil”—if that concept has merit—will be pushed back by at least several decades. Recent innovations, in essence, have given the United States a significant increase in its exploitable natural resource base.
The direct and indirect economic benefits for both employment and incomes are likely to be substantial. Higher incomes will have positive and pervasive ripple effects, including, as with natural resources generally, the ability to utilize these newly exploitable resources to generate economic rents, royalties, and governmental tax revenues.
Although significant influence over world oil prices from these new resources seems unlikely given their incremental contribution to global supply, any reduction in prices would benefit consumers in the United States and worldwide. US consumers may receive an extra benefit from domestically produced oil since transport costs associated with imports will not be incurred.
Given this relatively idyllic oil situation, where might the uncertainties be lurking? There are costly disruptions associated with development surges that occur on resource frontiers as a sort of “gold rush” replay takes hold, though enlightened planning could help make these conditions transitory. Fort McMurray—the heart of Alberta’s oil sands boom—is experiencing just such trauma, as are parts of North Dakota with extensive drilling in shale formations.
More generally, the bounty of newly exhaustible resources could sustain the fossil fuel era beyond the point where more climate-friendly energy resources might have been expected to kick in. At the very least, this could intensify tensions with advocates promoting an accelerated shift to renewable resources. On the other hand, it could buy time and thereby also strengthen the pursuit of carbon capture and sequestration technology if reinforced by a concurrent determination to internalize environmental spillover effects in the price of the resource (more on this later).
There are significant geopolitical uncertainties associated even with North American oil self-sufficiency. It is often argued that US policy in the Middle East is driven by concerns and threats related to oil production. Would this change substantially if North America were to achieve oil selfsufficiency, not to mention become a net oil exporter? One can make the case that oil self-sufficiency would reduce the sensitivity of US policy to that part of the world. Nevertheless, in a worldwide oil market, major disruptions in foreign oil supplies would create worldwide oil shocks and price instability from which neither the United States nor Canada would be immune. However, self-sufficiency ought to at least provide North America with a buffer from such shocks and reduce the need for impulsive policy reactions.
Trade Implications of North American Energy Independence
The prospect of North American energy independence has numerous implications given the strong relationship between the United States and Canada. The long shared border, common resource-producing regions, democratic institutions, culture, language, and military interests all play their parts. Interconnected electric transmission flows give the two countries a joint incentive to ensure integrity of the grid. And overall, trade and investment undergird strong economic ties.
The United States currently imports 2.4 million barrels per day from Canada, its leading oil supplier at 26 percent of overall imports. Conversely, the overwhelming share of Canadian oil exports goes to the United States. Even though US oil imports from other regions will continue, that closely intertwined connection can only become more pronounced in the years ahead, with Canada further raising its share of a sharply declining volume of total US oil imports.
At the same time, rapidly expanding output of Canadian oil sands (which may approach 5 million barrels per day by the mid-2020s) will prompt Canada to seek additional markets for its exports. A significant part of the controversial Keystone XL pipeline’s throughput could be oil in transit, for refining in foreign trade zones, rather than destined for US consumption. Although not an unusual practice in international commerce, this has already provoked a hostile reaction from environmental groups and will test the US commitment to free-trade principles.
This rapidly changing continental energy picture also prompts a consideration of the associated environmental consequences, taken up next.
Energy Independence and the Environment
The development of natural resources often disturbs the natural environment. Fossil fuels—coal, petroleum, and natural gas— are all extracted via mining or drilling and are commonly associated with environmental damages. Additionally, the use of fossil fuels for energy is associated with environmental damages, particularly air pollution and greenhouse gas (GHG) emissions—a precursor to global warming. Nevertheless, the benefits of this energy are essential to the high standard of living in North America, and environmental damages are generally accepted by society as a nonmarket cost of energy production that needs to be mitigated and managed through regulatory policy initiatives.
The two new sources of energy for North America—the Canadian oil sands and the fracking of shale oil and gas—present both new environmental challenges and new opportunities. Even at current oil sands output of close to 2 million barrels per day—let alone the increases foreseen over the course of the next several decades— there are significant environmental challenges facing both oil producers and governmental authorities charged with crafting environmental policies.
Extraction of the energy content (called “bitumen”) of the Canadian oil sands is by mining or in situ. While mining currently dominates the recovery process, in situ will begin to be dominant within a few years as the bulk of reserves are deep underground. Either way, managing wastes constitutes a major challenge. As one of us (Darmstadter) wrote in a 2010 backgrounder for RFF, tailing ponds “must be isolated and monitored for at least a decade to ensure the integrity of surrounding soils and groundwater.”
There are ecological worries, too. The deposits are in boreal forest, whose diversity and wildlife habitat represent a prized part of Canada's national endowment and where successful reclamation of disturbed lands is not yet a demonstrated fact. Preserving the Athabasca River, even as its waters are needed in waste-management operations, will also be a challenge.
The fracking process involves the use of explosive charges and the injection of sand, water, and chemicals to break up the rock and allow, not just gas or oil, but also the injected—and contaminated—fluids to be pumped to the surface. It is largely the fate of these waste fluids that has produced environmental anxiety. As of this writing, though short of definitive scientific and epidemiological findings, anecdotal evidence has led to suspicions pointing to the presence of chemical wastes in air, soil, and groundwater to which the public may be exposed as a result of the fracking process. These concerns have led to moratoria in some jurisdictions and pressure for tighter regulation.
It remains unclear when and whether these environmental concerns can be scientifically validated and, if they are, whether better regulation, better technology, or better policy can adequately address them.
That said, the large new sources of natural gas available with fracking also create environmental opportunities. The problem of energy self-sufficiency is confounded by concerns over carbon emissions associated with fossil fuel energy. In essence, the long-term problem involves the adequacy of energy fuels constrained by concerns over GHG emissions associated with that energy source.
On its face, progress toward North American energy self-sufficiency, particularly as it relates to fossil fuels and oil, appears to exacerbate the GHG environmental problem. However, this concern needs to be tempered—GHG emissions associated with natural gas are only about 50 percent of the emissions of coal per unit of energy produced. The most advantageous place to substitute natural gas for coal is in electrical power generating facilities. This substitution is already taking place as the price of natural gas declines sharply. The US Energy Information Administration has projected that coal’s share of US electricity production could fall to 30 percent in 2035 (from 42 percent in 2011) as natural gas is substituted. Although at a lesser rate of replacement, substitution of natural gas for oil is also anticipated to occur in the transportation sector.
Partly due to the increasing role of natural gas—although also because of a sluggish economy—US GHG emissions have declined for several years. Indeed, some analysts suggest that emissions reduction targets for 2020, once viewed as unattainable, may be achievable in part due to the large role for natural gas. The huge increases in shale gas and oil production driven by fracking technology have changed the national mix of fossil fuels and promise to continue this shift into the future.
These trends should mirror a continued reduction in GHG emissions from electricity generation and, with a lag, in transport sector emissions. Furthermore, the shifting fuel mix in power generation need not be driven by legislation or policy, but will be largely the outcome of the market’s response to dramatically lower natural gas prices and the expectation that substantially lower prices would continue into the future.
Several concluding points deserve emphasis. New oil and gas supplies offer possibilities of moving North America to oil and energy self-sufficiency. Although environmental challenges associated with the development and use of fossil fuels persist, they appear manageable.
Will increased availability and use of natural gas diffuse pressures to develop non–fossil fuel solutions? In the longer run, fossil fuel energy likely will need to be replaced by less environmentally damaging renewables. Because the road to a major role for renewables is a long one, natural gas, while not perfect, could facilitate our transition to major reliance on non-emitting renewables.
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The Persistent Importance of Oil and the Surge in Natural Gas
In its 2002 Annual Energy Outlook, the Energy Information Administration (EIA) foresaw that US oil consumption would reach 8.5 billion barrels in 2010; in fact, consumption in that year amounted to only 7 billion barrels. Conversely, domestic oil production exceeded EIA’s expectations by 8 percent.
These joint trends in consumption and production meant that net oil imports in 2010 amounted to 3.4 billion barrels, compared to the 5.2 billion barrels of imports projected almost a decade earlier. The oil import share of consumption—often seen as the iconic marker of dependency—had fallen to 45 percent, against the 55 percent figure projected 10 years before.
To understand the background to these—and some broader energy—trends, it helps to briefly recap some notable underlying developments during this 10-year period. In the energy picture as a whole, the most significant development has been the enormous expansion of production and estimated proved reserves of natural gas in shale formations. As a result, natural gas, rather than coal, has become the energy source of choice in new US electric power generation. Additionally, the United States is poised to become a substantial exporter of liquefied natural gas in a sharp reversal of the expectation a decade ago that it would need to import the fuel to meet a growing level of gas demand.
But the oil statistics reflect important advances of their own. These have occurred on both the supply and demand sides of the market. The prospectively “game-changing” development on the supply side is the emergence of large-scale shale oil deposits in the Bakken formation, centered on North Dakota. In 2009, Bakken’s proven reserve additions of nearly 500 million barrels were the second-highest in the United States, with production running around 500,000 barrels per day.
While the oil supply-side trend has its basis principally in technological and geological progress, the steadily rising efficiency of energy utilization points to behavioral shifts by energy users in the energy marketplace. A manifestation of that development is a seemingly sustained fall in oil consumption per unit of the nation’s GDP.
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