Blog Post

Energy Independence - What Then? (Part One: The Centrality of Oil)

Nov 15, 2012 | Joel Darmstadter

This post is the first in a four-part series on energy independence and its significance (or insignificance). Click to read the second, third, and fourth installments.

“By around 2020, the United States is projected to become the [world’s] largest oil producer…” so states the International Energy Agency (IEA) in its World Energy Outlook 2012, issued Nov. 12 and quickly echoed by media around the world. In the process, the U.S. is expected to overtake Saudi Arabia in that lead role and, coupled with Canada and its burgeoning oil sands output, is likely to ensure North America becoming “a net oil exporter around 2030.”

Thus, the long-cherished goal – especially in the political domain – of U.S. oil self-sufficiency may, before too many years, provide the missing link in the country’s energy profile. Whether, and to what extent, such independence in oil shields us from turmoil in world oil markets is a matter to which we will turn in the next blog in this series. (Keep in mind that references to “energy independence” almost always refer to oil; in natural gas, coal, and probably renewables, the country is more than self-sufficient).

It will surprise no one that this turn of events sharply upends trends and projections in U.S. oil requirements and availability foreseen just a decade ago. In 2002, DOE’s Energy Information Administration (EIA), foresaw, in its Annual Energy Outlook, that U.S. oil consumption would reach 8.5 billion barrels in 2010; in fact, consumption in that year amounted to only 7 billion barrels. Conversely, domestic oil production exceeded EIA’s expectations by eight percent.

These joint trends in consumption and production meant that net oil imports in 2010 amounted to 3.4 billion barrels, compared to the 5.2 billion barrels of imports projected almost a decade earlier. And it meant as well that the oil import share of consumption – often seen as the iconic marker of dependency – had fallen to 45 percent as against the 55 percent figure projected ten years before. These results, though not entirely separable from the influence of the economic recession dating from 2008, deserve to be viewed as pretty significant shifts in oil-market fundamentals.

To understand the background to these – and some broader energy – trends, it helps to briefly recap some notable underlying developments during this 10-year period. In the energy picture as a whole, clearly the most significant development has been the enormous expansion of production and estimated proved reserves of natural gas in shale formations such that that fuel, rather than coal, has become the energy source of choice in U.S. electric power generation, a trend driven by the fact that gas has seen its real wellhead price decline by more than 50 percent is just the last six years. Additionally, the US has positioned itself as a substantial exporter (in the form of liquefied natural gas – LNG) in a sharp reversal of the expectation, a decade ago, that the it would need to import LNG to meet a growing level of gas demand.

But the oil statistics cited above reflect important advances of their own. These have occurred on both the supply and demand sides of the market.  The – prospectively “game-changing” – development on the supply side is the emergence of large-scale shale oil deposits in the Bakken formation, centered on North Dakota. Development of the Bakken shale resource involves the same hydraulic fracturing (“fracking”) technique employed in the successful – albeit with some unresolved environmental issues – extraction of shale gas deposits across the country. The Bakken has made North Dakota the nation’s fourth -largest oil-producing state behind Texas, Alaska, and California.  In 2009, Bakken’s proven reserve additions of nearly 500 million barrels were the second-highest in the U.S., with production running around 500,000 barrels per day.

While the oil supply-side trend has its basis principally in technological and geological progress, the steadily rising efficiency of energy utilization – e.g., through enhanced fuel economy in transport— points to behavioral shifts by energy users in the energy marketplace. A manifestation of that development is a seemingly sustained fall in oil consumption per unit of the nation’s GDP. With the mandated future more stringent automobile miles per gallon (MPG) requirements in mind, we believe the phrase “seemingly sustained” can probably be employed with confidence.

To recap: the trends reviewed here make IEA’s World Energy Outlook’s conjecture of zero U.S. oil imports – plausibly within the next several decades – a dramatic turnaround from a perspective that would have seemed hopelessly far-fetched just a few years ago. That said, the implication of zero oil imports may not represent the unalloyed blessing for the US economy with which it is often, and reflexively, portrayed. The benefits, along with surrounding uncertainties, of that state of affairs will be the subject in the next part of this series.

Posts in this series:

1. The Centrality of Oil

2. Zero Oil Imports: Benefits – But With Some Lurking Uncertainties

3. The Broad Goal of North American Energy Independence

4. Energy Independence and the Environment