Gushing about America’s Energy Future

A triumph of market forces rather than government planning

By Desmond Lachman

In November, the International Energy Agency (IEA) recognized the remarkably positive developments in the U.S. energy sector of the past few years. Not only did the IEA project that U.S. oil production would exceed that of Saudi Arabia by 2020, it also projected that the United States would become virtually energy independent by 2035. However, what the IEA did not do was emphasize how much of this good news has occurred as the result of market forces rather than government planning aimed at securing energy independence.

The IEA is now projecting that U.S. oil production will increase markedly to over 11 million barrels a day by 2020. That should allow U.S. oil imports to decline to 4 million barrels a day from their present level of around 10 million barrels a day. The IEA is also forecasting that the United States will become a major natural gas exporter over the next few years.

Whether or not the IEA’s bold projections materialize, there can be little doubt that major change is underway in the U.S. energy sector. At the start of the Obama administration in January 2009, the expectation was that U.S. oil production would continue its decline of the past two decades and that oil imports would continue to increase. Instead, there has been a veritable boom in U.S. oil and gas production that has already significantly reduced U.S. energy import dependence.

Since 2008, U.S. oil production has increased by around 25 percent. This has facilitated a reduction in oil imports as a share of U.S. oil consumption from 60 percent in 2005 to around 42 percent at present. More dramatically yet, the United States has now overtaken Russia as the world’s largest natural gas producer, as a result of a boom in shale gas production. In less than a decade, shale gas production has increased from 2 percent of U.S. natural gas production to around 37 percent at present.

Energy independence has been a foreign policy goal of successive U.S. administrations since President Nixon set that goal in 1973 in response to a major Middle Eastern oil supply disruption that followed the Yom Kippur War. However, over the past four years, the turnaround in the U.S. energy sector toward virtual energy independence has been driven by market-related phenomena rather than by the implementation of a national energy plan.

Among the more important of the market-related phenomena underlying the U.S. energy sector’s dramatic turnaround have been game-changing technological innovations including horizontal drilling and hydraulic fracturing. These innovations have allowed shale gas and “tight oil” to be extracted in a cost-efficient manner, thereby dramatically increasing U.S. proven oil and gas reserves. In addition, major increases in fuel economy have occurred as a result of the surge in international oil prices in 2008 and the subsequent restructuring of General Motors and Chrysler following their bankruptcies.

The economic benefits being derived from the U.S. move to energy independence are considerable. Over the past four years around 1.7 million oil and gas jobs have been created in the energy sector, while by 2020 one could expect 3 million new jobs to have been created. At the same time, there could be an appreciable narrowing in the U.S. trade deficit as natural gas exports increase and as oil imports decline. At present, oil imports account for around two-thirds of the U.S. trade deficit in goods. Were the United States indeed to cut oil imports by 6 million barrels per day by 2020, as projected by the IEA, this would save the United States around $180 billion a year at current oil prices.

Abundant and cheap natural gas should also support a U.S. manufacturing revival by attracting energy-intensive industries such as aluminum, paper, iron, steel, and petrochemicals to the United States. Such a revival would be supported by the fact that U.S. natural gas prices are presently around one-third of the European level and around one-quarter of the Japanese level.

No less impressive would be the geopolitical gains to the United States from energy independence. No longer would the United States have to kowtow to the oil and gas producers of the Persian Gulf. OPEC’s control over oil prices would be substantially diminished, while at the same time Middle Eastern power would be considerably eroded by significantly lower oil export incomes. In addition, as North America becomes more than self-sufficient in natural gas, liquefied natural gas from other parts of the world will be freed up to supply Europe. This will considerably reduce the leverage that Russia presently enjoys over Europe through its control of a significant proportion of the natural gas supply to that region.

With so much to be gained both economically and politically from U.S. energy independence, one has to hope for one thing: that the U.S. government does not now get in the way of the market-driven forces that have at last offered the United States the real prospect of energy independence.