Exactly 40 years ago, on November 25, 1973, Richard Nixon, in a speech to the nation in the wake of the OPEC oil embargo, first described the desire to maintain self-sufficiency in energy. These are Nixon’s exact words:
Let me conclude by restating our overall objective. It can be summed up in one word that best characterizes this Nation and its essential nature. That word is “independence.” From its beginning 200 years ago, throughout its history, America has made great sacrifices of blood and also of treasure to achieve and maintain its independence. In the last third of this century, our independence will depend on maintaining and achieving self-sufficiency in energy.
What I have called Project Independence 1980 is a series of plans and goals set to insure that by the end of this decade, Americans will not have to rely on any source of energy beyond our own.
1980 came and went and the United States was no closer to self-reliance in energy, though it did begin to use less oil as prices spiked to $102.62 (2012 dollars) per barrel in 1980. The oil glut of the 1980s and the consequent price tumble quieted the calls for energy independence. With lower prices and more diversified energy sources, energy became more of an afterthought. However, the post-2003 rise in oil prices once again resulted in calls for energy independence. As horizontal drilling and hydraulic fracturing became economical in 2009, causing a surge in US oil and gas production, energy independence may finally appear within reach for the first time since 1942, when defined as a minimization of crude oil imports.
From pundits to the president, energy independence has become a hot topic of discussion. In an Orwellian bend, the term itself can only be positive. Who could possibly be opposed to having a self-reliant US that need not depend on the rest of the world? However, the feasibility of a truly self-reliant US and the benefits that it would bring are two distinguishable issues that deserve a second look.
Meeting US Energy Demand Domestically
A quick look at the figures reveals a decades long shortfall in US domestic energy supply.
US Consumption and Production in 2012 in million tons of oil equivalent (mtoe)
- Oil – Consumed – 819.9 mtoe – Produced – 394.9 – Shortfall – 51.8%
- Gas – Consumed – 654 mtoe – Produced – 619.2 – Shortfall – 5.3%
- Coal – Consumed – 437.8 mtoe – Produced – 519.9 – Surplus – 15.7%
- Nuclear – Consumed – 183.2 mtoe – Produced – 183.2
- Hydro – Consumed – 63.2 mtoe – Produced – 63.2
- Renewables – Consumed – 50.7 mtoe – Produced – 50.7
While US oil production has grown every year since 2008 and gas production has increased every year since 2006, the US is still some way off from being able to produce enough energy domestically to meet its needs. Factoring in oil imports from Canada and Mexico, equivalent to 197.9 mtoe, the shortfall only decreases to 27.6%. The question then becomes, can the US increase its production of oil by 27.6% of consumption or decrease consumption to equal production?
In terms of oil, the United States has a reserves to production ratio of only 10 years, meaning that present oil reserves would be depleted in 10 years, given that production continues at the current rate. It should be noted that, despite increasing production, US proved reserves have only increased since 1992 from 31 billion barrels to 35 billion in 2012. This figure, however, depends on oil prices, technological advances, which impact the cost of extraction, and discovery of new reserves.
Increasing production, with its high capital costs and need for associated infrastructure, is a longer term prospect, making immediate energy independence unfeasible. It should be noted that petroleum is only used for 1% of US electricity generation, with its primary usage being transportation and industrial purposes. As a result, energy independence becomes an issue of finding alternatives for transportation rather than electricity; the US is self-sufficient when it comes to electricity production. It is very simple to conflate the issue of electricity production and transportation and many pundits seem to ignore the difference.
Reducing use of oil for transportation can come in several forms. Vehicles can become more efficient, Americans can use less energy by driving and flying fewer miles, or another fuel source can supplant or diversify the energy used for transportation.
Partly as a result of market forces and partly because of government regulations, American vehicles have become more efficient. Between 1980 and 2012, the average fuel efficiency increased by 46.5%, from 24.3 mpg to 35.6 mpg. However, as the number of vehicles in the US has increased over the years, oil consumption only grew. Recent trends, partly as a result of higher gasoline prices, have prompted Americans to drive and fly fewer miles, decreasing consumption. In fact, US oil consumption peaked in 2005 at 20.8 mbd, even before the 2008 financial crisis hit. As such, energy independence becomes a reality as oil production increases while consumption simultaneously decreases.
Similarly, over a medium-long time horizon, the US, with its present glut of natural gas, could potentially supplement the oil used for transportation. There are several options to this end. Vehicles can be retrofitted or manufactured to run on compressed natural gas (CNG) or liquefied natural gas (LNG). CNG and LNG achieve comparable performance to gasoline or diesel at a fraction of the cost. The infrastructure is, for the most part, not present. However, T. Boone Pickens has, through Clean Energy Fuels, tried to address this by connecting both coasts with LNG refueling stations. This map from Clean Energy Fuels demonstrates the coast to coast connections. However, it should be noted, as more vehicles begin using natural gas as fuel, its price will increase, given flat production. Nascent gas-to-liquids technology could also advance to the point of being an effective replacement for gasoline, though the technology is not economical at this point.
Natural gas, coupled with improvements in battery technology in electric vehicles and improvements to efficiency and increases in conversation, could supplement oil-derived fuels and decrease US oil consumption and thus reliance on foreign oil.
Given that this natural gas infrastructure and other technologies are not ready in the short term, it appears that energy independence can only be achieved by increasing oil production and decreasing demand. Even if the United States were able to produce all of its oil domestically, it would still not be energy independent, and the costs associated with any potential autarkey would be too great to bear.
Oil is a global fungible commodity. Oil produced domestically and in other countries is equally interchangeable on the open market, though price differences do exist because of shipping costs and the needs of refineries for certain types of oil. As such, US prices would still remain at the mercy of the markets. Does independence allow for the country to be susceptible to instability and supply shocks around the world? Closing the country to both oil imports and exports, thus providing an autarkic market, would insulate it from these shocks but also increase prices. Most of the recent increases in oil production have been from unconventional sources, making it more expensive to extract when compared to conventional oil. Note, as domestic oil prices increase in this scenario, more production would come online as more expensive to extract deposits become economically viable. In addition, these increased prices would only hurt the economy as they shave points off of already slow GDP growth.
Moreover, it would not make sense for the US to produce all of its own oil, even if it had the capacity. It can receive cheaper oil from abroad than it can produce by itself. After all, the point of energy is to sustain economic activity; more expensive energy would only hurt economic activity. As it stands, autarkic markets with a surfeit of a good lower prices, as evident in the US natural gas market that exports very little, while autarkic markets with a scarce good will increase its price.
Fungibility of oil makes it such that energy independence is a convenient rhetorical phrase, but would remain unworkable and lacking substance.
Feasibility Aside, What are the Benefits of Energy Independence?
As previously mentioned, energy independence does not appear feasible in the short-term without a major restructuring of the US economy. What would actually happen if the US removed itself from the global oil market?
In this scenario, where the US simultaneously increases supply and decreases demand, oil prices would decline, increasing economic activity around the world. The US current account deficit would shrink and the US would stop funding the national oil companies that fund various states. On the surface, this appears wholly beneficial, more money stays in the US, unfriendly regimes receive less funding, and economic activity increases. However, over the years, petrostates have come to rely on oil at over $100 a barrel to balance state budgets. As these states and their expensive low-tax, high-subsidy, high-entitlement ways of life begin to unravel, they become less stable. A basic principle of human psychology is that human beings hate to lose more than they like to gain, especially when it comes to losing things that they have been accustomed to receiving.
Where government largess once bought the loyalty of the governed, repression begins to become dominant as a means of controlling the people and allowing the regimes to remain in power. At this point, the US has lost the leverage and influence it once enjoyed as a buyer, and, often, protector of these countries. Thus, without US dollars flowing to these petrostates, they become more volatile, alienated, and more prone to domestic and international conflict. Although many of these states are undemocratic and violate many of the rights Americans hold dear, they provide convenient bulwarks against instability, particularly in the Persian Gulf.
Two potential scenarios emerge, one where China and other emerging economies fill the void that the US left behind and buy petroleum and natural gas from these countries, thus helping them balance their budgets. With disappointing recent growth figures, however, these countries are unlikely to equal the lost US demand. In addition, these countries certainly do not possess the power project capability and naval strength to maintain the sea lanes of communication to energy suppliers. As a result, they would feel vulnerable and begin building military capacity, which is inherently destabilizing. An arms race between the emerging countries and the US is possible. A second scenario could be the unraveling of OPEC as countries attempt to break their cartel rules and make up their budget shortfalls by increasing production, resulting in a race to the bottom. Once again, prices would plummet and these states would face unbalanced budgets and the resulting protests.
Neither of these scenarios is particularly welcome and the second and third order effects of an energy independent US, though two potential scenarios are given here, are difficult to predict due to the interrelated nature of world petroleum supply and demand and how different entities would react to it.
This is only an urging to avoid unbridled optimism; US energy independence may seem to be only beneficial, however, upon inspection of the secondary and tertiary effects, it may be just as negative as positive.
Note: All data herein derived from BP Statistical Review of World Energy 2013 or BP historical data, unless otherwise noted.