Welcome to the New Energy World Order
In a recent weekly energy report, the Energy Information Administration (EIA) forecast that the United States will overtake Russia as the world’s leading producer of oil and natural gas this year. This stunning change has turned the U.S. energy supply paradigm on its head in just a few years, from one of scarcity and vulnerability to greater energy security and opportunity.
When Thomas Edison pioneered electric lighting and power systems he couldn’t have envisioned the computers, cell phones, and life-changing advances which his innovations have enabled. In a similar fashion, American and global energy abundance has the potential to alter the economic and security landscape in profound and unforeseeable directions.
American shale oil and natural gas production is rewriting the economic and energy maps. Its energy supply expectations have been transformed over the past five years from 2008. The specter of rising imports is yielding to the reality that the United States can export natural gas, refined products, and eventually crude oil. As evidence of this change, the United States became a net refined product exporter in 2011, the first time since 1949. EIA projects that it will be a net natural gas exporter by 2020.
It is time to retire 40-plus years of the energy scarcity paradigm and embrace energy abundance. The benefits of this new paradigm are just now emerging and with them the an opportunity to harness resource plenty to create jobs, attract oil and gas-reliant industry to this country’s shores, improve America’s balance of payments, and reduce a debilitating national debt.
Natural gas prices will remain lower in the United States than most of the world, creating a competitive advantage in energy intensive manufacturing. The United States is already benefitting from billions of dollars in planned investment in chemical plants and other manufacturing facilities.
Moreover, increased domestic oil production has far reaching geostrategic implications. It reduces America’s vulnerability to petro-extortion by terrorists, to the political machinations of OPEC and nationally-owned oil companies, and to supply disruptions from external contingencies.
U.S. oil production is exerting downward pressure on global energy prices. Unrest in Egypt and Libya have reduced oil output with limited effect on global prices. While changes in Saudi Arabia production helped moderate reductions in output elsewhere, U.S. energy production growth has beneficially influenced global supply and prices.
The future-defining opportunities provided by U.S. energy abundance, however, are accompanied by enormous responsibilities and caveats if we are to maximize them.
First, we must not confuse oil and gas abundance with overall energy security. Energy security requires a system encompassing not only ample and diverse energy supplies but the infrastructure to connect supply with the market. It means modern electric grids and the secure networks to operate and manage the electric transmission system, pipelines, and other energy transportation systems. It also means ensuring that the regulatory systems work effectively to enable new infrastructure to be developed when necessary. All of these components are essential to providing energy to consumers without interruption.
Second, we should remember how new-found abundance was achieved. Shale oil and natural gas was the result of private capital, entrepreneurial risk taking, and markets. Private companies invested and experimented with new techniques of production. Higher gas prices in the early 2000s created a market for natural gas produced using these more expensive technologies. In turn, greater use of technologies, including hydraulic fracturing and horizontal drilling, reduced costs and allowed expanded application. Allowing markets to work was critical to the success of this country’s current oil and gas abundance.
Third, American policymakers must not confuse energy independence with energy security. The energy markets are global markets and prices will largely be set on a global basis, particularly for oil—a commodity that is easy to transport and store. Just as with other commodities, the United States will be interdependent with trading partners on energy. For this reason increasing America’s energy self-sufficiency does not make it less concerned about global energy security or suggest that the country can retreat from the world.
Therefore, America’s economic and strategic interests require a commitment to global trade. Allowing the market to work will maximize the value of resources and benefit consumers in the long-term by encouraging new technology and new resources. This means trusting the market regarding energy exports. The global market has supplied the United States with energy for decades at the most affordable prices. History has shown us that government restrictions will distort the market and limit production.
Fourth, we must beware of irrational exuberance. Increasing supply is taking place in the context of global markets that are subject to supply decisions beyond America’s control and characterized by increasing demand—set to grow by 50% between now and 2040 as global purchasing power rises, particularly in Asia. Oil will continue to be a global market and prices will be set based on global supply and demand.
Shale oil and gas abundance is a global phenomenon as these resources are located around the world. The United States has unique characteristics that facilitated the technology and investment that resulted in the unprecedented reversal of oil and natural gas decline. However, shale resources are beginning to be developed in Australia, China, Europe, and other regions.
These developments will enhance global energy security—change that is in America’s national interest. It reduces the probability of international conflict over access to energy. Moreover, U.S. prosperity and security rely increasingly on the emergence of strong markets abroad eager for its goods and services. These markets can’t blossom without their own access to ample and affordable energy.
Fifth, we must remember that the energy picture can change precipitiously by dint of many factors. Not long ago government reports, speeches by energy elites and public officials were based on a fundamental assumption of long-term and irreversible U.S. dependence on foreign energy supplies. How wrong they were!
America cannot rest on past production and investment. The energy landscape changes rapidly, evidenced by what has happened with shale oil and gas production in five years. We need to continue policies that provide for the environmentally sustainable development of shale resources as well as a broad portfolio of energy options.
Current abundance does not lessen the need for energy efficiency, particularly as we seek to improve carbon efficiency and lower energy costs. Moreover, it should not diminish in the slightest an “all of the above” energy strategy that seeks a highly diverse mix of energy sources to meet America’s evolving economic, security, and environmental objectives.
Shale oil and natural gas development and the corresponding energy and economic benefits are a manifestation of the techical innovation and entrepreneurial spirit for which the United States is known and admired. The economic prosperity of shale energy will spread around the world, just as we can expect that groundbreaking innovations are possible with other energy solutions. Perhaps one of the greatest lessons we can embrace is that creativity, persistence, and free markets offer solutions and alternatives to what appear to be unsolvable challenges.j