Americans Gaining Energy Independence
Monday, February 06, 2012
Americans Gaining Energy Independence
By: Rich Miller, Asjylyn Loder and Jim Polson,
Bloomberg
The U.S. is the closest it has been in almost 20 years to
achieving energy self-sufficiency, a goal the nation has been
pursuing since the 1973 Arab oil embargo triggered a recession and
led to lines at gasoline stations.
Domestic oil output is the highest in eight years. The U.S. is
producing so much natural gas that, where the government warned
four years ago of a critical need to boost imports, it now may
approve an export terminal. Methanex Corp., the world's biggest
methanol maker, said it will dismantle a factory in Chile and
reassemble it in Louisiana to take advantage of low natural gas
prices. And higher mileage standards and federally mandated ethanol
use, along with slow economic growth, have curbed demand.
The result: The U.S. has reversed a two-decade-long decline in
energy independence, increasing the proportion of demand met from
domestic sources over the last six years to an estimated 81 percent
through the first 10 months of 2011, according to data compiled by
Bloomberg from the U.S. Department of Energy. That would be the
highest level since 1992.
"For 40 years, only politicians and the occasional author in
Popular Mechanics magazine talked about achieving energy
independence," said Adam Sieminski, who has been nominated by
President Barack Obama to head the U.S. Energy Information
Administration. "Now it doesn't seem such an outlandish idea."
The transformation, which could see the country become the
world's top energy producer by 2020, has implications for the
economy and national security -- boosting household incomes, jobs
and government revenue; cutting the trade deficit; enhancing
manufacturers' competitiveness; and allowing greater flexibility in
dealing with unrest in the Middle East.
Output Rising
U.S. energy self-sufficiency has been steadily rising since
2005, when it hit a low of 70 percent, the data compiled by
Bloomberg show. Domestic crude oil production rose 3.6 percent last
year to an average 5.7 million barrels a day, the highest since
2003, according to the Energy Department. Natural gas output
climbed to 22.4 trillion cubic feet in 2010 from 20.2 trillion in
2007, when the Federal Energy Regulatory Commission warned of the
need for more imports. Prices have fallen more than 80 percent
since 2008.
At the same time, the efficiency of the average U.S. passenger
vehicle has helped limit demand. It increased to 29.6 miles per
gallon in 2011 from 19.9 mpg in 1978, according to the National
Highway Traffic Safety Administration.
The last time the U.S. achieved energy independence was in 1952.
While it still imported some petroleum, the country's exports,
including of coal, more than offset its imports.
Environmental Concern
The expansion in oil and natural gas production isn't without a
downside. Environmentalists say hydraulic fracturing, or fracking
-- in which a mixture of water, sand and chemicals is shot
underground to blast apart rock and free fossil fuels -- is
tainting drinking water.
The drop in natural gas prices is also making the use of
alternative energy sources such as solar, wind and nuclear power
less attractive, threatening to link the U.S.'s future even more to
hydrocarbons to run the world's largest economy.
Still, those concerns probably won't be enough to outweigh the
benefits of greater energy independence.
Stepped-up oil output and restrained consumption will lessen
demand for imports, cutting the nation's trade deficit and
buttressing the dollar, said Sieminski, who is currently chief
energy economist at Deutsche Bank AG in Washington.
Cutting Trade Deficit
With the price of a barrel of oil at about $100, a drop of 4
million barrels a day in oil imports -- which he said could happen
by 2020, if not before -- would shave $145 billion off the deficit.
Through the first 11 months of last year, the trade gap was $513
billion, according to the Commerce Department. Crude for March
delivery settled at $96.91 a barrel yesterday on the New York
Mercantile Exchange.
The impact on national security also could be significant as the
U.S. relies less on oil from the Mideast. Persian Gulf countries
accounted for 15 percent of U.S. imports of crude oil and petroleum
products in 2010, down from 23 percent in 1999.
"The past image of the United States as helplessly dependent on
imported oil and gas from politically unstable and unfriendly
regions of the world no longer holds," former Central Intelligence
Agency Director John Deutch told an energy conference last
month.
Arab Oil Embargo
That dependence was underscored in October 1973, when Arab oil
producers declared an embargo in retaliation for U.S. help for
Israel in the Yom Kippur war. The U.S. economy contracted at an
annualized 3.5 percent rate in the first quarter of the next year.
Stock prices plunged, with the Standard & Poor's 500 Index
dropping more than 40 percent in the year following the
embargo.
Car owners were forced to line up at gasoline stations to buy
fuel. President Richard Nixon announced in December that because of
the energy crisis the lights on the national Christmas tree
wouldn't be turned on.
Today, signs of what former North Dakota Senator Byron Dorgan
says could be a "new normal" in energy are proliferating. The U.S.
likely became a net exporter of refined oil products last year for
the first time since 1949. And it will probably become a net
exporter of natural gas early in the next decade, said Howard
Gruenspecht, the acting administrator of the EIA, the statistical
arm of the Energy Department.
Cheniere Energy Partners LP may receive a construction and
operating permit as early this month from the Federal Energy
Regulatory Commission for the first new plant capable of exporting
natural gas by ship to be built since 1969 in the U.S.
Houston-based Cheniere said it expects the $6 billion plant to
export as much as 2.6 billion cubic feet of gas per day.
Mitchell the Pioneer
The shale-gas technology that's boosting U.S. natural gas
production was spawned in the Barnett Shale around Dallas and Fort
Worth by George P. Mitchell, who was chairman and chief executive
officer of Mitchell Energy & Development Corp.
Helped by a provision inserted in the 1980 windfall oil profits
tax bill to encourage drilling for unconventional natural gas, the
Houston-based oil man pursued a trial-and-error approach for years
before succeeding in the late-1990s. The fracking method he devised
cracked the rock deep underground, propping open small seams that
allowed natural gas trapped in tiny pores to flow into the well and
up to the surface.
Recognizing that Mitchell was on to something, Devon Energy
Corp. bought his company in 2002 for about $3.3 billion and
combined it with its own expertise in directional drilling, a
method derived from offshore exploration.
Hunting for Oil
Traditional vertical drilling bores straight down, like a straw
stuck straight in the earth. Directional drilling bends the straw,
boring horizontally sometimes a mile or more through the richest
layer of rock, allowing more of the trapped fuel to make it into
the well. This slice of rock is like the kitchen, where ancient
plants and creatures came under so much pressure that they cooked
into natural gas and oil.
The oil boom a century ago tapped reservoirs of fuel that rose
out of those layers and got trapped in large pockets closer to the
earth's surface, or used vertical wells that could get out only a
portion of the fuel stored in the rock. The new technology has
Devon and its competitors hunting beneath decades-old oil plays
long thought depleted.
About an hour's drive north from where Devon's soon-to-be-
completed new glass headquarters towers 50 stories above downtown
Oklahoma City, the company is exploring for oil in the
Mississippian and other formations, where oil majors once made
their fortunes. It's racing companies such as Chesapeake Energy
Corp. and SandRidge Energy Inc. to buy leases and drill wells.
North Dakota Booming
Crude production in the U.S. is already increasing. Within three
years, domestic output could reach 7 million barrels a day, the
highest in 20 years, said Andy Lipow, president of Lipow Oil
Associates in Houston, a consulting firm. The U.S. produced 5.9
million barrels of crude oil a day in December, while consuming
18.5 million barrels of petroleum products, according to the Energy
Department.
North Dakota -- the center of the so-called tight-oil
transformation -- is now the fourth largest oil-producing state,
behind Texas, Alaska and California.
The growth in oil and gas output means the U.S. will overtake
Russia as the world's largest energy producer in the next eight
years, said Jamie Webster, senior manager for the markets and
country strategy group at PFC Energy, a Washington- based
consultant.
While U.S. consumers would still be susceptible to surges in
global oil prices, "we'd end up sending some of that cash to North
Dakota" rather than to Saudi Arabia, said Richard Schmalensee, a
professor of economics and management at the Massachusetts
Institute of Technology in Cambridge.
1.6 Million Jobs
The shale gas expansion is already benefiting the economy. In
2010, the industry supported more than 600,000 jobs, according to a
report that consultants IHS Global Insight prepared for America's
Natural Gas Alliance, a group that represents companies such as
Devon Energy and Chesapeake Energy.
More than half were in the companies directly involved and their
suppliers, with the balance coming at restaurants, hotels and other
firms. By 2035, the number of jobs supported by the industry will
rise to more than 1.6 million, IHS said. Some 360,000 will be
directly employed in the shale gas industry.
The oil boom is also pushing up payrolls. Unemployment in North
Dakota was 3.3 percent in December, the lowest of any state. Hiring
is so frantic that the McDonald's Corp. restaurant in Dickinson is
offering $300 signing bonuses.
State governments are reaping benefits, too. Ohio is considering
a new impact fee on drillers and increasing the tax charged on
natural gas and other natural resources extracted, Governor John
Kasich has said.
In Texas, DeWitt County Judge Daryl Fowler has negotiated an
$8,000-per-well fee from drilling companies to pay for roads in the
district, southeast of San Antonio.
Lot of Traffic
"It takes 270 loads of gravel just to build a pad used for
drilling a well, which means a lot of truck traffic on a lot of
roads that nobody except Grandpa Schultz and some deer hunters may
have used in the past," said Fowler, whose non-judicial post gives
him administrative control over the county.
The federal government will see tax payments from shale gas rise
to $14.5 billion in 2015 from $9.6 billion in 2010, according to
IHS. Over the period 2010 to 2035, revenue will total $464.9
billion, it said.
Manufacturing companies, particularly chemical makers, also
stand to win as the shale bonanza keeps natural gas cheaper in the
U.S. than in Asia or Europe.
Dow Chemical Co., which spent a decade moving production to the
Middle East and Asia, is leading the biggest expansion ever in the
U.S. The chemical industry is one of the top consumers of natural
gas, using it both as a fuel and feedstock to produce the compounds
it sells.
First Since 2001
Midland, Michigan-based Dow is among companies planning to build
crackers, industrial plants typically costing $1.5 billion that
process hydrocarbons into ethylene, a plastics ingredient.
The new crackers will be the first in the U.S. since 2001, said
John Stekla, a director at Chemical Market Associates Inc., a
Houston-based consultant.
Vancouver-based Methanex said last month it plans to take apart
the idled Chilean factory and ship it to Louisiana to capitalize on
natural gas prices.
The shift to increased energy independence is also the result of
government policies to depress oil demand.
"Vehicles are getting more efficient, and people who travel
won't be driving more miles," said Daniel Yergin, chairman of IHS
Cambridge Energy Research Associates.
Automakers have agreed to raise the fuel economy of the vehicles
they sell in the U.S. to a fleetwide average of 54.5 miles per
gallon by 2025 under an agreement last year with the Obama
administration.
No 'Silver Bullet'
The 2008-09 recession helped lower oil demand, and consumption
has lagged even as the economy has recovered, said Judith Dwarkin,
director of energy research for ITG Investment Research in Calgary.
Coupled with higher domestic output, "this has translated into an
import requirement of some 15.4 barrels per person per year --
about on par with the mid-1990s."
She cautioned against thinking that rising oil and gas
production is a "silver bullet" for solving U.S. economic woes.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.
in New York, agreed, saying in a Jan. 20 note to clients that oil
and gas output accounts for just 1 percent of gross domestic
production and isn't likely on its own to be able to pull the
economy into above-trend growth.
Cooling on Wind
Some companies are hurting from the shale gas glut. With
abundant supplies making it the cheapest option for new power
generation, Exelon Corp. scrapped plans to expand capacity at two
nuclear plants, while Michigan utility CMS Energy Corp. canceled a
$2 billion coal plant after deciding it wasn't financially viable.
NextEra Energy Inc., the largest U.S. wind energy producer, shelved
plans for new U.S. wind projects next year.
Investors also are cooling on wind investment, partly because of
falling power prices. T. Boone Pickens, one of wind power's biggest
boosters, decided to focus on promoting natural gas-fueled trucking
fleets after dropping plans for a Texas wind farm in 2010.
"Wind on its own without incentives is far from economic unless
gas is north of $6.50," said Travis Miller, a Chicago- based
utility analyst at Morningstar Inc. Natural gas for March delivery
settled at $2.55 per million British thermal units on New York
Mercantile Exchange yesterday.
When Obama lauded increased energy production in his State of
the Union speech on Jan. 24, he drew criticism from some
environmentalists opposed to fracking.
Waning Confidence
"We're disappointed in his enthusiasm for shale gas," said Iris
Marie Bloom, director of Protecting Our Waters in Philadelphia.
Obama "spoke about gas as if it's better for the environment, which
it's not."
Deutch, who headed an advisory panel on fracking for the Energy
Department, voiced concern that public confidence in the technology
will wane if action isn't taken to address environmental concerns.
The potential positive impact of increased North American
production are "enormous," he said.
Higher U.S. output lessens the ability of countries like Iran
and Russia to use "energy diplomacy" as a means of strengthening
their influence, Amy Myers Jaffe, director of the Baker Institute
Energy Forum at Rice University, and her colleagues wrote in a
report last year.
While the U.S. will still have to pay attention to issues such
as Israel's security and Islamic fundamentalism in the Mideast,
which could affect oil prices, it won't have to be as worried about
its supplies.
Positive 'Shock'
Carlos Pascual, special envoy and coordinator for international
energy affairs at the State Department, suggested at a Council on
Foreign Relations conference in December that the increased
production in the U.S. and elsewhere gives Washington more
"maneuverability" in using sanctions to deal with Iran and its
nuclear aspirations.
The increased U.S. production of oil and natural gas is a
"positive supply shock" for the economy and for national security,
said Philip Verleger, a former director of the office of energy
policy at the Treasury Department and founder of PKVerleger LLC, a
consulting firm in Aspen, Colorado.
"We aren't there yet, but it looks like we're blundering into a
solution for the energy problem," he said.