17th July 2012
Oiling the wheels of a nation
Recession, depression and the decline of the western nations' economic power – that's the almost constant leitmotif of financial news.
But there are sightings of green shoots which could signal the way to a massive turnaround in what is still the world's biggest economy – for investors willing and able to take a long term view.
The good news is that the United States is moving towards energy self-sufficiency, and, going further, towards becoming a global oil and gas exporter. This will have beneficial knock-on effects on America's cost of doing business, push up the value of the dollar, and potentially create millions of jobs, revolutionising the US economy.
Equally important are the geo-political implications as the role of the Middle East in energy supply is potentially reduced. This could cut US military expenditure – admittedly difficult for Washington politicians of any hue – or at least alter its spending pattern.
The bad news is that not everyone believes in energy independence – and that it could cause substantial environmental difficulties.
Seeking the holy grail
The US policy holy grail is energy independence. And that has been the goal ever since the early 1970s when the OPEC oil exporting nations imposed an export embargo and pushed up the price three to four fourfold to $12 a barrel – immediately a reaction to the 1973 Arab war with Israel but also necessary because the oil countries in the Middle East, Latin America and Africa were effectively subsidising growth in the developed economies.
It's all due to a huge increase in US oil and natural gas exploration and production in the U.S, driven by higher oil and gas prices. This is a once in a generation or so change – just as the OPEC action in the 1970s was countered with a major switch to less oil intensive technologies. The five miles to the gallon gas guzzler was replaced by more efficient cars.
A chart from Guinness Asset Management's latest Global Energy report shows Saudi oil production peaked at around 10 million barrels a day in 1980 but fell back to four million a day over the next two to three years. That partly reflects North Sea oil coming on stream but also the move to economising on oil use.
Saudi oil production rising
But the early 1990s saw Saudi exports move back to the eight million line – the long term average – and more recently back to 10 million a day. There are some short term factors here, according to Guinness, – Saudi Arabia has increased production to put political pressure on Iran so it reaches a deal with Israel over its nuclear facilities, pushing potential war onto the back burner. Additionally, this represents Saudi Arabian support for the current US stance over Syria – the Saudis want a second term for President Obama and aim to help with lower oil prices, a major determinant of US voting intentions.
But lowering oil prices also has a second aim – making it less attractive for the US to build up its own resources.
Self sufficiency – the American way
Leading energy economist Phil Verleger believes "Energy self-sufficiency is now in sight, within a decade, the U.S. will no longer need to import crude oil and will be a natural gas exporter."
This is really the classic success of American entrepreneurs," he says. "These were people who saw this coming, managed to assemble the capital and go ahead."
He cites: "Small energy companies using such controversial techniques as hydraulic fracturing, along with horizontal drilling, are unlocking vast oil and natural gas deposits trapped in shale in places like Pennsylvania, North Dakota and Texas. North Dakota, for instance, now produces a half-million barrels a day of crude oil, and production is rising."
A Berlin Wall moment
There are countless warnings about the environmental degradation from shale oil and gas production but equally hopes that the profit motive will see many working on solutions. And while the improvement will not be as marked as in the late 1970s, moves to vehicle fuel efficiency are underlined by carrot and stick taxation. But if shale can be "tamed", the US and wider western world face a once in a generation "Berlin Wall" moment that changes everything.
The combination of cheap domestic oil and low cost gas to fire power stations should mean the US is the world's largest hydrocarbon producer by 2020, eclipsing both Saudi Arabia and Russia – again with geo-political overtones. China, by contrast, has very limited fuel resources of its own – there are forecasts that it will have the political task of dealing with middle east regimes as this decade progresses, leading to possible instability.
None of this factors in renewables such as solar and wind power where the US also aims to be a market leader. Verleger says it will probably take a couple of decades for other countries to exploit their shale gas resources because they can't easily re-create the recipe of entrepreneurship, property rights and financing that led to the U.S. shale boom.
By 2020, nearly half of the crude oil America consumes will be produced at home, while 82% will come from its side of the Atlantic, according to the U.S. Energy Information Administration. By 2035, oil shipments from the Middle East to North America "could almost be nonexistent," the Organization of Petroleum Exporting Countries recently predicted, partly because more efficient car engines and a growing supply of renewable fuel will help curb demand, according to a Wall Street Journal article.
Unhappy with the rosy scenario
But not everyone agrees energy self-sufficiency is a good idea in a globalised world – even discounting the enviromental implications.
According to this article from The Atlantic, while proponents suggest dramatic ramifications for U.S. diplomacy as the change "achieves a long-sought goal of U.S. policy-making: to draw more oil from nearby, stable sources and less from a volatile region half a world away." However, while depending less on unsavoury regimes like Saudi Arabia is a satisfying concept, it doesn't dissolve America's fealty to global crude prices.
"This means that even if all U.S. oil came from North America, disruptions in Iraq or Iran would still ramp up global prices and still damage the U.S. Economy so U.S. energy security is still very tied to the Middle East regardless of where the U.S. is getting its oil–an undesirable reality that will keep the U.S. militarily invested in the Middle East for decades to come."
And there are questions over whether energy independence is a worthwhile goal in the first place.
"We're not moving towards a world of energy independence, nor should we," said Peter Orszag, President Obama's former budget director and vice chairman of global banking at Citigroup. "It doesn't make any sense. The U.S. should be focusing on a "diversification of sources" (i.e. natural gas and renewables) so the economy can withstand shocks in energy prices. If the U.S. were to reduce its sources of energy based on where it comes from it would make the U.S. economy less secure."
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