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Q&A: Energy Independence

From the Magazine: Thursday, May 17, 2007

‘Energy independence’ may be a hollow slogan, but ‘energy security’ is something we can achieve. Separating fact from fantasy, Steven Hayward shows how.

 

1. What is energy independence?

It’s usually a synonym for energy self-suffi­ciency—the idea of the United States supplying all, or nearly all, of its own energy needs. The public reacts enthusiastically to the idea in polls, which is why every president since Richard Nixon has announced indepen­dence as a distant goal.

We seldom hear self-sufficiency lauded in connection with other essential goods, like automobiles, airplanes, food, or medicines. The U.S. currently imports about one-fourth of its timber—required for building homes and printing newspapers, books, and magazines. But we don’t hear calls for “ending our dependence on for­eign timber.”

 

Chart 12. What about energy security?

Energy security generally means reduc­ing dependence on politically unstable sources like the Middle East or Venezuela.

 

3. Why do some people think we should worry more about where we get our energy than about where we get other important resources?

The short answer is OPEC, the Organization of Petroleum Exporting Countries. From the first oil shock of the 1970s, American consumers have disliked the fact that Middle Eastern oil exporters can manipulate prices by acting as a cartel. In addition, there’s political concern that American oil purchases from corrupt Arab and Muslim countries may be funding terrorism. These concerns have been extended to Venezuela, Nigeria, and other shaky or erratic regimes, which could cause disruptions in supply.

There are some large misperceptions behind this pop­ular view. Much of the public, for instance, believes we get most of our oil from Saudi Arabia and other politi­cally troubled nations. In fact, in 2005, the most recent year for which the Department of Energy has statistics, the U.S. imported 5 billion barrels of oil, with only 11 percent coming from Saudi Arabia. As Figure 1 shows, our leading foreign supplier is Canada, which provides about 16 percent of our imports, and Mexico is second, at 12 percent. The other major sources are, in order, Saudi Arabia in a virtual dead heat with Venezuela; Nigeria; and Iraq.

 

4. How much oil does the U.S. itself produce?

About 1.9 billion barrels, or a little more than one-fourth of what we use. Together, the United States, Canada, and Mexico currently provide a majority of U.S. oil consumption.

 

5. How secure is our energy supply today?

In some ways, more secure than it was in the 1970s. The proportion of imported oil has doubled in the last 30 years, but the U.S. economy is less vulnerable to oil price shocks caused by supply disruptions, as we saw with the recent tripling of the cost per barrel. First, the U.S. economy is much more energy-efficient. Since 1975, energy consumption per unit of gross domestic product has fallen 48 percent. Second, oil represents a shrinking share of total U.S. energy consumption—from 44 percent in 1970 to 40 percent in 2005.

Since the 1970s, industrialized nations have established several important backstops against short-term supply disruptions. The U.S. Strategic Petroleum Reserve (SPR), in operation since 1977, holds enough oil to supply domestic needs for two months if imports are completely cut off.

In addition, following the oil shocks of the 1970s, the G8 nations established the International Energy Agency (IEA), which does for energy what the International Monetary Fund does for world banking: it acts as a mechanism to smooth and ameliorate disruptions and shocks to international energy markets. In fact, it was the IEA, acting through its standby Coordinated Emergency Response Measures (CERM), that supplied the U.S. with gasoline after Hurricanes Katrina and Rita damaged Gulf Coast refineries and pipelines. The CERM helped prevent serious gasoline shortages and severe price increases in the fall of 2005.

The U.S. is less vulnerable, but it is not invulnerable. A serious, long-term disruption of oil supplies from the Middle East would send oil and gasoline prices soaring after a few weeks.

 

Chart 26. How important is oil, compared with other kinds of energy?

Oil certainly poses unique political challenges, but it accounts for about two-fifths of total American energy use, almost entirely in the transportation sector. The main use of energy in the U.S. is to produce electricity, where oil plays a tiny role (see Figure 2). Half of our electricity is generated from coal, which the U.S. has in abundance. Natural gas and nuclear power together account for almost 40 percent of our electricity. Hydropower and other renewables (solar, wind, etc.) supply the last 10 percent. A small amount of U.S. natural gas and coal is imported—the gas from Canada, the coal mainly from Latin America—but nearly all the energy sources for electricity are homegrown.

 

7. Since we actually get only about one-eighth of our oil from Middle Eastern countries, why not just stop buying from them?

Oil is a fungible global commodity. If we stopped buying oil from Saudi Arabia and the Gulf States, and made up the difference with more from Canada and other nations, the effect on the world oil price would be negligible. And switching our suppliers would not reduce our vulnerability in the event of a Middle East disruption.

Imagine that the U.S. is not buying any of Saudi Arabia’s oil and the Saudis, attacked by terrorists, have to stop selling oil altogether. Then other countries that depend on Saudi oil—Spain and France, say—will scramble to buy Nigerian oil to replace Saudi. The excess demand will push up the price of oil, not just in Nigeria, but also around the world. Indeed, even if the U.S. were completely supplied by its own domestic oil, the domestic price would still rise sharply in the event of a Saudi disruption because other oil importers would be desperate for our oil.

 

8. Where are we headed? Will our oil imports keep increasing?

We import more oil, but in some ways, the United States energy supply is more secure today than it was in the 1970s.

Yes. The Department of Energy predicts that oil imports will grow from the current rate of 10 million barrels a day to 17 million barrels a day—by the year 2030. The reason is simple: demand for oil will keep rising (by about 30 percent by 2030) and domestic supply won’t.

 

9. Can the U.S. significantly reduce oil imports by increasing its domestic oil and gas production?

Right now, the U.S. has about 22 billion barrels of “proven” oil reserves, which are defined as “reasonably certain to be recoverable in future years under existing economic and operating conditions.” This represents about a three-year supply at our present consumption rate. New reserves are being found all the time, and predicting when oil reservoirs will run dry is a risky business. There are an estimated 112 bil­lion barrels more of oil that could be recovered with existing drilling and production technology. Together with existing reserves, this would represent 15 years’ worth of oil use.

Three-quarters of this amount (87 billion barrels) is located offshore. Of the rest, 18 billion barrels are in Alaska. To unlock this potential energy, political opposition to offshore and Alaskan drilling must dissipate. Will that happen? Not with the current state of the debate. Drilling opponents often point out that oil in the Alaska National Wildlife Refuge, now off-limits to exploration, amounts to six months’ worth of U.S. oil consumption at current rates. Actually, no one knows for sure how much oil and gas is in ANWR, but even a “six-month” field would be substantial, with a depressive effect on oil prices.

Alaskan oil production from Prudhoe Bay in the early 1980s was a significant factor in reducing oil imports and forcing the world price of oil down from its record price in 1980. Between 1980 and 1985, oil imports fell by 2 million barrels a day, nearly 40 percent. (The severe 1982 recession also played a role.) Since then, however, production has been steadily declining, to less than 900,000 barrels a day in 2005 from 2 million barrels a day in the mid-1980s. Since 1985, total domestic oil production has fallen from 8.9 million bar­rels a day to 5.1 million barrels.

 

10. What about natural gas?

Chart 3The situation is much the same. The U.S. has 204 trillion cubic feet of nat­ural gas reserves (about a ten-year supply at current rates of usage), and there are an estimated 656 trillion cubic feet of undiscovered but recoverable natural gas in U.S. territory, which would provide fuel for many decades. Like potential oil reserves, however, two-thirds of these potential reserves are offshore or in Alaska.

In one way, the natural gas problem is worse than the oil problem. Our natural gas supply is almost entirely homegrown—plus Canada. We have few ports, again mainly for environmental reasons, that can accept tankers carrying natural gas in liquid form (which is then converted to gas ashore). With natural gas, we may have energy independence (again, with Canada in the picture), but we certainly don’t have energy security. Because of the high cost of natural gas in this constrained environment, many U.S. manufacturers are moving abroad. (See page 44 for an interview with Andrew Liveris, CEO of one of those manufacturers, Dow Chemical.)

The political constraints on oil and gas exploration in American territory, if they continue, will contribute to an increase in the amount of oil and natural gas imports in the coming decades. But even if we do develop more of our oil and gas reserves, we will need new energy sources in the long term.

 

11. Can we reduce our oil use and oil imports through alternative fuels, such as ethanol and wind power?

Not any time soon. The world uses oil, natural gas, and coal for a reason. They are inexpensive and abundant. The problem with the alternative energy sources under development today is that they cost dramatically more than fossil fuels. To become attractive to consumers and industry, these sources require large subsidies or much higher fossil fuel prices.

Even more important, many renewable energy resources have limited scale. Even at maximum capacity, ethanol is unlikely to provide more than 15 percent of our total fuel requirements. Wind power, which currently needs subsidies, tax breaks, and mandates to spur private-sector investment, would consume vast areas to make even a small dent in current sources of electricity. The same with solar. The Department of Energy’s long-range forecasts expect only a slight increase in the total share of energy from renewable sources over the next 25 years—from 6 percent to 8 percent of consumption, including hydropower.

Still, capital is flowing into new energy projects. According to one estimate from Venture Business Research, private investment in alternative energy accounted for more than 8 percent of total venture capital spending in the United States in 2006, up from about only 1 percent in 1998 (see Figure 3). But there is also concern on Wall Street about a biomass bubble, and critics argue that subsidies play a dominant role in making these venture capital investments profitable (see “Biofuels or Bio-Fools?” page 58).

 

12. What about electric cars?

Since the big energy problem is with transportation, one solution would be to draw power for cars and trucks from the electri­cal grid, which itself is powered by coal, natural gas, and nuclear energy. Hybrid electric cars would draw a charge by being plugged into the grid overnight, unlike current hybrids that charge only from braking motion while being driven. According to some estimates, an auto fleet that was 50 percent plug-in hybrid by 2025 would save as much as 8 million barrels of oil a day (about 40 percent of our current consumption).

 

13. Can coal make us self-sufficient?

The United States is blessed with an abundance of coal, which is cheap to mine and burn. While coal can be turned into electricity with far less air pollu­tion than in the past, the process produces higher levels of greenhouse gas emissions than natural gas or nuclear power, raising concerns about the human contribution to climate change. New research is find­ing ways to capture and store coal-burning emissions, but, on a large scale, the tech­nology will almost certainly be expensive.

Coal can also be turned into a liquid fuel for transportation using technology that has been around for nearly a cen­tury and was used extensively both by the Germans during World War II and by the South Africans during the apartheid-inspired embargo. The process works. Sasol, a large company headquartered in Johannesburg, is making synthetic fuels from coal, but again, prices are not com­petitive with open-market oil and natural gas. America’s nascent coal-to-liquid industry needs sub­sidies or loan guarantees to build capacity.

 

14. What about using hydrogen gas, rather than oil, for transportation energy?

The trouble with hydrogen fuel is that it doesn’t exist naturally and must be made, either from natural gas (which is itself in short supply domestically) or from water by electrolysis, a process that requires huge amounts of electricity to separate the hydrogen atom from the two oxygen atoms.

It might be possible to produce large amounts of hydro­gen cleanly with nuclear power, but that possibility is not getting much attention at the moment—in part because nuclear power is viewed by politicians as dangerous. Beyond these hurdles, there is the formidable problem of creating the distribution infrastructure, storage, and auto-engine technology to use hydrogen. Although auto companies are building prototype hydrogen fuel-cell cars, it is unlikely they will make a full-scale effort at develop­ment if they commit to scaling up plug-in hybrid models.

 

15. How should we think about energy security going forward?

A sensible policy goal would be not independence, but diversification: a portfolio of energy technologies and global supplies that minimizes the economic and political risk of disruptions from any particular region or energy source.

A diversification strategy can recognize that, even if supplies are precarious, the case for free trade in energy is just as strong as for any other commodity or economic activity. Energy independence, which could also be described as energy protectionism or isolationism, is a counterproductive goal. By limiting ourselves to only what we can make at home, we make ourselves poorer.

If a desire to reduce greenhouse gas emissions motivates us to discourage oil consumption, we should avoid the temptation to provide specific subsidies to particular alternative approaches. A carbon tax, which would use the market to decide how and where to reduce greenhouse gas emissions most efficiently, would be preferable.

 

16. So what’s the road to diversification?

We’re already doing some things right. Both private-sector interest and government fund­ing are stimulating research into potentially breakthrough innovations. But we have to remember that revolutionary change in our sources of energy is practically impossible, and not necessarily desirable. Attempts at energy inno­vation driven by the public sector have yet to change the dynamics of energy economics in any significant way.

Today, industries are lining up on Capitol Hill looking for subsidies and favors—but, in the long run, we will only achieve a resilient energy portfolio through technologies and supplies that are cost-competitive with fossil fuels. We should be skeptical of the political class promising to lead our energy future. OPEC’s Sheikh Yamani once remarked that the Stone Age didn’t end because we ran out of stones, and the oil age won’t end because we run out of oil. We will eventually leave fossil fuels behind for the same reason we began to use them in the first place—people are always eager to take advantage of new technologies that are cleaner, cheaper, and more efficient than the ones they replace.

Steven F. Hayward is the F. K. Weyerhaeuser Fellow at the American Enterprise Institute. He is the author of, among other books, “Index of Leading Environmental Indicators, 2007,” and “Greatness: Reagan, Churchill, and the Making of Extraordinary Leaders.”

Charts by MacNeill and MacIntosh

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