The Road to Energy Independence in the US?

2012-01-25T15:37:00.000-08:00

Recently the US Energy Information Administration published an Early Release Overview of its Annual Energy Outlook 2012. The report comes amid a virtual sea change in the discourse about the US' energy future.

Prior to the global recession of 2008-09 there were fears of greater US dependence on oil and gas imports, given declining production and robust demand growth. High energy prices, conflicts in the Middle East (gone wrong), and the rise of states such as Russia and Venezuela were all factors which pointed, supposedly, to the long-term decline of US geopolitical power based on exacerbated American energy insecurity.

Now, however, the public discourse from pundits and the media has a very different tone. The US is instead on the road to "energy independence." The shale gas revolution and the spin-off growth in "light tight oil" from shale plays in the US, combined with oil sands from Canada, deepwater Gulf of Mexico (GoM) and offshore Arctic supply will -- combined with the flattening of US oil demand -- vastly reduce the need for the US to import oil and gas from trouble spots around the world, such as the Middle East. The US will not need energy from "nasty" countries, but can now get it from its own territory and from friendly neighbours closer to home.

As a result the untrammelled pessimism of a few years ago about the US' energy future, and its geopolitical impact, has been replaced by wild and excitable optimism.

But as always things are never so black and white. It is true that due to shale gas output the US will no longer become a major market for Liquid Natural Gas (LNG) exporters, as forecast only a few years ago. Russia, for example, had hoped to be an LNG exporter to the US, but before the decade is out the US could instead become an LNG exporter. The market share of oil imports to the US has also declined in recent years, as oil demand has flattened while domestic output, boosted by liquids from shale plays, biofuels and crude oil from the GoM, has grown. Meanwhile Canada, due to higher oil sands production, has pretty much displaced Saudi Arabia as the US' number one source of oil imports.

However energy independence for the US, whatever that actually means, is a fantasy. Given the shale gas phenomenon the need for the US to import gas will be minimal. But oil is a different story. The US consumes about 20 million barrels per day (b/d) of oil, or nearly 25% of global demand. Nearly half of this is supplied by imports, so there is a huge gap to be made up, and the EIA still expects imports to supply 36% of the US' oil needs in 2035.

Canada will remain a key supplier of oil to the US, while Brazil will probably move up the ranks as its exports start to ramp up in a few years. This will make the Middle East less important to the US as an oil-supplying region. Nevertheless should Canada decide to open up an energy export route to Asia it will no longer have to rely on the US as a sole export market. The decision by the Obama adminsitration to put the KeystoneXL pipeline on the backburner will encourage Canadian efforts to seek energy markets elsewhere. Mexico is also a major oil supplier to the US, but Mexico faces declining production and growing local consumption. Also, conventional onshore oil output in the US is still declining in many areas. There are, therefore, a set of pluses and minuses that need to be considered.

Finally, two other points need to be made.

Firstly, the major sources of oil expected to provide output growth -- deepwater GoM, Arctic offshore and shale plays -- will attract greater scrutiny in the environmental policy domain. For example, since the BP oil spill in the GoM deepwater drilling is now subject to a more stringent regulatory environment; while development of shale plays is getting more attention from federal and state regulators as well. Canada, now the US' No.1 supplier of imported oil, will increasingly rely on oil sands production to supply the US market. This has generated environmental unease, as evidenced by the decision of the Obama administration to deny approval for the KeystoneXL pipeline (which would have transported this Canadian heavy oil to US Gulf Coast refineries). The debate between energy security and environmental concerns is thus likely to sharpen.

Secondly, the US is already becoming a less important market for OPEC Middle East producers, not for any political reason but simply because faster-growing demand lies elsewhere, and closer: Asia. Over the next decade and beyond Middle East barrels will increasingly head East, supplying the energy-hungry emerging markets of China and India. The US may not need Saudi barrels like it used to, but China will buy them instead. Therefore the fact that the Middle East will still be central to global oil supply will limit the geopolitical impact of the US being able to rely more on domestic supply and neighbouring producers.

Things are rarely quite what they seem

The EIU Views

2012-01-23T13:56:00.000-08:00

Generally my blogs will be about my own views on what's going on in the energy world, but I thought I would kick my blogging off with some links to short energy stories included in the EIUViews Energy website. The most recent one is on shale gas and the depressed nat.gas prices in the US. The shale gas boom has contributed to a glut in supply, but industry players are still avidly snapping up unconventional gas assets like they are going out of fashion (Sinopec and Total). Forecasts for shale gas are still bullish, but environmental scrutiny is also growing; not just in the US but elsewhere. Bulgaria, for example, has recently prevented Chevron from hydraulic fracturing activity.

Also, read about America's end of the affair with petroleum as US gasoline consumption feels the impact of higher fuel prices, tighter fuel economy standards, and sluggish economic growth. Gasoline demand peaked in 2007 but has been dropping ever since. The growth in domestic "light tight oil" from shale gas plays rich in liquids (such as Bakken and Eagle Ford) will combine with flat oil demand to help reduce -- but not eliminate -- the need for the US to import oil. American energy independence, however, is not a reality despite the media hype on this issue.

That's all for now, but stay tuned. These issues, and more, will be explored in greater depth in future posts.

PETROPOLITICS

The Road to Energy Independence in the US?

The EIU Views