The United States will overtake Saudi Arabia as the world’s leading oil producer by about 2017 and will become a net oil exporter by 2030, the International Energy Agency (IEA) recently predicted.
According to the IEA, increased oil production, combined with new American policies to improve energy efficiency, means that the United States will become “all but self-sufficient” in meeting its energy needs.
The IEA points to resurgence of oil and gas production in the US, and particularly the unlocking of new reserves of oil and gas found in shale rock, as a key factor in its revival as an energy producer. The widespread adoption of techniques such as hydraulic fracturing and horizontal drilling has made those reserves much more accessible. In the case of natural gas, they’ve resulted in a vast glut that has sent Henry Hub prices plunging.
We’ve heard it all before
The IEA’s report has not revealed anything new. In their December 2011 report, the Institute for Energy Research (IER) declared that the United States has vast energy resources.
This report said that the amount of oil that is technically recoverable in the United States is more than 1.4 trillion barrels. That’s over five times the reserves of Saudi Arabia and is close to the total world proven oil reserves in 2011. Given such an optimistic outlook for US energy future, an assessment of its credibility is in order.
A degree of caution should be exercised before wholeheartedly accepting the findings of both the IEA and IER’s reports that point to a bright energy future for the United States.
First, there is much uncertainty over the future of oil prices. The IEA forecast assumes oil prices to hit $145 a barrel by 2035. If there is another global recession and oil prices collapse (they were as low as $30 in late 2008) then the anticipated US expansion will halt until there is a price recovery.
Predicting oil prices so far into the future is like predicting the Melbourne Cup winner two decades from now. In fact, if unconventional oil from the US floods the market over the next two decades, this may result in a sharp fall in oil prices, similar to that witnessed in the US natural gas market.
Second, the IEA report does not take into account uncertainties related to domestic political considerations in the United States, particularly those pertaining to the impact of increased production and consumption of fossil fuels on the environment. The US “Energy Independence and Security Act“ of 2007 is an energy policy law that consists mainly of provisions designed to increase energy efficiency and the availability of renewable energy.
In their predictions, the IEA do not factor in the potential for political opposition to an increase in fossil fuel production in the US, and the potential effect of this important law on the future of renewable energy in the US. Instead, their prediction is based solely on the assumptions about technological improvements.
In fact, the future of green energy in the US would suffer a long delay if the IEA forecast proves to be correct. If correct, they would signal huge increases in greenhouse gas emissions on a global scale that would put hopes of curbing dangerous climate change beyond reach. It’s doubtful whether the US electorate, or at least large parts of it, would accept such a scenario.
A scenario in the US is also possible where politicians decide that it may be beneficial to slow down the impetus and maintain some of the resources underground while helping to deplete foreign sources through imports. Limitations of domestic production would lengthen reserve life, while imports and prices are kept at reasonable levels. A small dose of foreign dependence in the short term may be preferred to low dependence at first and high dependence in the long term.
This may be a wise choice given that it would be based on an important historical precedent: the outcome of the Mandatory Oil Import Program (MOIP). The MOIP restricted oil imports into the United States from 1959. The scheme was intended to prevent a dependence of the United States on imported petroleum supplies.
From 1962, the maximum level of imports was set at 12.2% of domestic production. What the MOIP achieved in the long run was a peak in the US domestic oil production, the formation of OPEC, and higher reliance on oil imports.
A history of failed predictions
Third, the IEA have a history of failed predictions and are known to be overly optimistic in their annual energy outlooks. For example, a team of scientists from Uppsala University in Sweden who studied the 2008 World Energy Outlook concluded the forecasts of the IEA were unattainable.
Curiously, and in what further questions the viability of the IEA’s prediction, according to the 2012 Annual Energy Outlook, published by the Energy Information Administration of the United States Department of Energy, the US will remain dependent on imports for about 43% of its oil consumption even through 2035. This prediction is in stark contrast to that of the IEA, and it comes from the most reputable source in the US.
The IEA has also been criticised by environmental groups for underplaying the role of renewable energy technologies in favour of nuclear and fossil fuels. Given their future predictions that favour fossil fuels over renewable energy, such bias is also evident in their most recent report.
The importance of US energy independence has been loudly proclaimed by every president since Nixon, but “energy independence” has remained little more than a dreamy campaign slogan. Even a high profile report published by the Council of Foreign Relations in 2006 has argued that US energy policy has been plagued by myths, such as the feasibility of achieving “energy independence”.
Consequently, for the next two decades, the challenge facing the United States is to become better equipped to manage its dependencies, rather than pursue the chimera of independence.