Energy Independence – What Then? (Part Two: Benefits—but Lurking Uncertainties)
International Energy Agency (IEA) projections show the US overtaking Saudi Arabia as the world’s lead oil producer and, in the light of Canada’s oil sands production, North America becoming a net oil exporter by around 2030. Zero US oil imports—a goal of various US administrations since at least the Nixon era—promise to relieve, at least to some extent, security concerns associated with dependence on foreign oil sources. Additionally, the pure economic benefits to America are likely to be substantial. However, environmental and geopolitical concerns will create uncertainties that confound political decision making.
Projections of US oil independence are largely the result of new technologies—particularly hydraulic fracturing (‘fracking”)—which, already dramatized by the enormous expansion of natural gas supplies in recent years, make huge oil resources previously locked in what were thought to be inaccessible shale oil deposits accessible at costs consistent with world oil market prices. Continued improvements in energy efficiency are a contributing factor in these projections.
An implication of this turn of events is that production-decline predictions of “peak oil”—if that concept has merit—will be pushed back by at least several decades. Recent innovations, in essence, have given the US a significant increase in its exploitable natural resource base. The direct and indirect economic benefits for both employment and incomes are likely to be substantial. Higher incomes will have positive ripples throughout the system.
Also, as with natural resources generally, the ability to utilize these newly exploitable resources will likely generate economic rents that are captured by the resource owners as land rents through various payments including royalties. Land owners in the US can capture a portion of the resource rents under their properties due to their ownership of subsoil mineral rights. Of course, governments too will benefit from the tax receipts collectible from the new set of economic activities.
Although significant influence over world oil prices from these new resources seems unlikely given their incremental contribution to global supply, any reduction in prices would benefit consumers in the US and worldwide. US consumers may receive an extra benefit from domestically produced oil since transport costs associated with imports will not be incurred.
Given this relatively idyllic oil situation, where might the uncertainties be lurking? Certainly, there are costly disruptions associated with development surges that occur on resource frontiers as a sort of “gold rush” replay takes hold, though enlightened planning could help make these conditions transitory. Ft. McMurray—the heart of Alberta’s oil sands boom—is experiencing just such trauma as are parts of North Dakota with extensive drilling in shale formations.
A major area of uncertainty is the environment. Both oil sands extraction and fracking are environmentally controversial. We’ll discuss environmental implications in upcoming posts—but suffice it to say, there are real risks and possible opportunities, as well as persistent uncertainty about them.
More generally, the bounty of newly exhaustible resources could sustain the fossil-fuel era beyond the point where more climate-friendly energy resources might have been expected to kick in. At the very least, this could intensify tensions with advocates promoting an accelerated shift to renewable resources. On the other hand, it could buy time and thereby also strengthen the pursuit of carbon-capture and sequestration technology if reinforced by a concurrent determination to internalize environmental spillover effects in the price of the resource.
Finally, there are, significant geopolitical uncertainties associated even with North American oil self-sufficiency. It is often argued that US policy in the Middle East is driven by concerns and threats related to oil production. Would this change substantially if North America were to achieve oil self-sufficiency, not to mention become a net oil exporter? One can make the case that oil self-sufficiency would reduce the sensitivity of US policy to that part of the world. Nevertheless, in a worldwide oil market, major disruptions in foreign oil supplies would create worldwide oil shocks and price instability from which neither the US or Canada would be immune. However, self-sufficiency ought to at least provide North America with a buffer from such shocks and reduce the need for impulsive policy reactions.
Let’s close with a bow to a recent observation in The Economist. We confess, in both the present piece and other writings, to having interchangeably used the terms “energy self-sufficiency” and “energy independence.” With respect to the geopolitical aspects addressed above, The Economist, faithful to British linguistic precision, says: “Oil prices are determined by global supply and demand, and gas is going the same way. Will America be self-sufficient? Maybe. Independent? No.”
Posts in this series: