Unlocking America’s Potential Energy

United States Shale gas plays, May 2011

Map of U.S. shale gas plays. May 2011, U.S. Energy Information Administration (Wikimedia Commons).

America is in the midst of one of the most significant energy revolutions in modern history. Due to the recent discoveries of vast reserves of shale oil and natural gas, the U.S. is in a position to become the world’s largest energy producer by 2015, surpassing both Saudi Arabia and Russia – combined. This momentum, however, can only continue if U.S. firms are allowed proper flexibility to explore, extract, and export shale oil and natural gas from U.S. territories. Government regulations covering drilling practices, such as fracking, must be re-examined and equitably altered such that energy companies may pursue their energy interests while satisfying environmental concerns. The energy revolution has critical implications for U.S. domestic and foreign policy with the potential to transform America’s economic prowess and energy self-sufficiency for years to come.

Current estimates for America’s resource endowment and extraction rates are very promising. Natural gas production is experiencing a momentous boom due to recent breakthroughs in unlocking natural gas trapped in shale. With these advances, shale gas production is forecast to increase from 42% of total U.S. gas production in 2007 to 64% in 2020. This level of growth is unprecedented, with the U.S. Government estimating there will be a 44% increase in total shale natural gas production from 2011 to 2040. With regards to oil production, the International Energy Agency predicts that U.S. oil production will rise to 11.6 million barrels per day in 2020, up from 9.2 million just a few years ago. This increase in oil production is orthogonal to trends in Saudi Arabia and Russia, which will see their production levels decline from 11.7 million to 10.6 million barrels and from 10.7 million to 10.4 million barrels, respectively. Leonardo Maugeri at Harvard has estimated that shale oil production alone could reach 5 million barrels per day by 2017. These statistics stand as a dramatic reversal from discussions in the energy community even 5 years ago when talk focused on declining fossil fuel reserves and the need to explore alternative forms of energy. Fossil fuels now dominate the energy game, and rightfully so.

Natural Gas Production from US Shales 2000-2013

Graph of natural gas production for U.S. shale plays. September 16, 2013 (Wikimedia Commons).

While sound environmental concerns do exist regarding shale oil and natural gas extraction, such as pollution of groundwater and the effect of mining towns on surrounding communities, they are often overblown. For example, in Pennsylvania only 3% of all wells were cited for flawed construction from 2008-2013. Fracking has been a successful extraction method since 1940, and new technologies – waterless fracking is a good example – have only made the process safer and more efficient. The most legitimate environmental concern associated with fracking has to do with the well casings that surround the fracking apparatus. Since fracking pumps water and sand into the ground at a high pressure, improperly made well casings and other sealants can crack causing leaks which pollute the surrounding environment. This problem could be solved by using stronger and properly fitted well casings. Simple environmental regulations at the state level requiring proper well construction, specifically emphasizing casings, could ameliorate many of the environmental concerns associated with fracking. There is also a surprising lack of publicly available data regarding the effects of fracking operations on the surrounding environment. Increasing the availability of this data by setting mandatory reporting requirements would fully inform nearby communities and government authorities. Fracking to extract shale oil and natural gas can be done safely; such has been the trend thus far. If a more relevant, simple, and fair regulatory regime were to be established by state governments, and perhaps the federal government, to address issues such as well casing construction and reporting requirements, fracking’s safety and efficacy would only be further reinforced. Regardless, fracking – as it stands today – is a no-brainer.

Fracking Site in Warren Center, PA 08

Fracking Site in Warren Center, Pennsylvania. August 23, 2013 (Wikimedia Commons).

Why is fracking already a no-brainer? Because the shale boom, which has been enabled by fracking methods, is having tremendous economic benefits for the U.S. Natural gas prices in the U.S. are some of the lowest in the world – half the price of gas in Europe and less than one-third the price of gas in Asian countries. Surging shale oil extraction has overloaded Gulf refineries and revived East Coast refineries. This increased supply is so shocking that domestic oil prices have lately fallen out of sync with global oil prices, and experts predict a U.S. oil “glut” if U.S. firms are not allowed to export crude oil. This abundance has critical implications for manufacturing in the U.S. Indeed, The Economist claims that the energy revolution is resulting in a “Factory North America.” This “Factory” is resulting in more domestic jobs across all industries, especially in the growing energy industry. Energy jobs in nearly every state have doubled since 2005. Some equate the fracking boom as being similar to a gold rush, with energy jobs offering high salaries for basic work in rural areas. David Petraeus seems to be on track when he claims we are about to enter the “North American Decades” powered by our new-found energy endowments.

While the macroeconomic benefits of America’s increased energy output are clearly tremendous, expectations for the average American consumer should be tempered. Though the price of natural gas has fallen in recent years due to our ability to tap into previously inaccessible shale reserves, the cocktail of booming transportation, a recovering economy, and rising exports have raised prices in the past year. In addition, the need for further fracking R&D is likely to drive costs up in the coming years. Shale oil is experiencing a similar phenomenon. Although the price of gasoline has fallen beyond global pricing levels in the U.S. for the short-term due to surging supply, the price of oil is determined on a global energy market and is projected to increase for the long-term as global demand continues to increase. The increased supply of natural gas and oil certainly has lowered costs for the American consumer for the time being, and will continue to do so when contrasted to an America without new-found energy reserves. However, Americans should not be expecting $2.00 per gallon gasoline prices anytime soon.

So what does this energy revolution mean for U.S. foreign policy? Many good things. America’s increased self-sufficiency will change the U.S.’ relationship with many other countries. Because of surging domestic supply, the U.S. will be less dependent on other nations for energy; in turn, this freedom will afford the U.S. greater flexibility in pursuing foreign policy interests because it will not be as constrained to secure energy resources abroad. Strategic relationships with nations such as Saudi Arabia and the United Arab Emirates are likely to change because there will be less of a need for their oil imports. Perhaps the U.S. will now be more forceful in advocating for democratic reforms within these non-democratic states now that it has greater autonomy on the energy front. In addition, the decreasing need to secure energy resources abroad may prevent the U.S. from becoming involved in regional disputes and conflicts to secure those interests.

America’s surplus of energy could also be an excuse for a more active role in foreign policy. America could gain more influence over other nations if U.S. firms are allowed to export energy resources. As we have seen in Europe, Russia’s domination of energy resources in Eastern Europe has enabled it to turn build new allegiances at the EU’s loss and expense. Consider the notable cases of Armenia and the Ukraine becoming part of Russian-led Eurasian Union. Please note that this author is not advocating for the U.S. to pursue an overbearing approach to energy exports like Russia, but rather a stable level of influence to help the U.S. realize its foreign policy objectives. If, for example, the U.S. could export to Central Asian states, it could gain more influence in the region and build a relationship that could allow these states to become closer to the West rather then being forced into a Eurasian Customs Union led by Russia. In a state like Japan, where natural gas sells for $17 compared to $3 in the U.S., greater exports from the U.S. could enhance a trade relationship with a major partner. Unfortunately, the U.S. is not reaping the benefits of energy exports because antiquated laws are in place that prohibit U.S. firms from exporting crude oil. In addition, the EPA has been very slow to grant export license requests for liquefied natural gas. These regulations are contrary to free market principles and concepts of free trade that America has advocated for since its inception. The U.S. government needs to allow U.S. firms to export and pursue their global energy interests more freely. The potential results of this policy change would provide more flexibility in U.S. foreign policy and would afford the U.S. even greater influence on the international stage.

Natural Gas Price Comparison

Comparison of natural gas prices in the United States, Japan, and the United Kingdom. September 30, 2011, U.S. Energy Information Administration (Wikimedia Commons).

This energy revolution will change America’s game, and for the better. Domestically, the U.S. will be more self-sufficient and experience the growth of an industry while boosting employment numbers (and therefore jobs) and observing lower energy prices. Internationally, America’s influence will extend to the importers of our energy, and there will be less dependency on other states for energy. These benefits, however, cannot be fully experienced under the current structure. State governments, and perhaps the federal government, need to formulate a simple and fair regulatory regime that will allow U.S. energy firms flexibility in fracking to unlock shale oil and natural gas while addressing legitimate environmental concerns such as well casing construction. The U.S. must also break its own barriers to exporting energy, such as the obsolete laws that currently prohibit U.S. firms from exporting crude oil from U.S. territory and the slow process of obtaining export licenses for natural gas. Only if these policy measures are implemented can America’s full energy potential be unlocked.

The Shale Revolution: July’s Snapshot

July was an exciting month in the energy sector. The world’s second largest oil company, Chevron, signed a 1.24 billion dollar deal with Argentina – the world’s second largest holder of shale gas reserves – to develop their oil and gas opportunities. The total scope of Chevron’s investments could exceed 15 billion dollars. Chevron isn’t the only company jumping at the promise of shale. Dow Chemical Company and Bridas Corp., an Argentine-Chinese joint venture between CNOOC Ltd and the Bulgheroni family, have also signed development deals with their South American partners.

Across the pond in Europe, global consulting company Navigant Consulting released a new study backing UK Prime Minister David Cameron’s claim that shale expansion could cut gas prices by a quarter: “… estimates suggest northern England could provide enough shale gas to meet the UK’s needs for more than four decades.” Nonetheless, Cameron still faces an uphill battle. His continental partners in the EU have expressed concern with the potential environmental implications linked to the process of extracting shale oil and gas, known as fracking. Despite the European Union being known for its stringent environmental practices, some EU countries such as Romania and the Netherlands seem to be tiptoeing towards the idea of fracking and its encompassing economic benefits, while others states – France stands as a prime example – are sprinting in the opposite direction. Despite Europe’s unnerving reliance on Russian energy, the EU’s potentially game-changing relationship with fracking continues to move at a glacial pace.

In Asia, the effects of the North American shale boom are being felt. American shale oil opportunities have enticed national midsized energy companies producing abroad to come back home. After being drawn into untapped energy hubs in Asia, companies like Anadarko Petroleum Corp and Newfield Exploration have begun to sell their billion dollar Asian portfolios in Thailand’s natural gas hotspots and China’s Bohai Bay. Subsequently, these companies are beginning their triumphant return to American soil.

Recently predicted by the International Energy Agency to be the world’s top oil producer by 2017, many countries are jumping aboard the American energy bandwagon early. Highlighting the energy-starved nature of today’s world, Chile has shown how serious they are about its American shale gas interests by establishing a chancery in Philadelphia earlier this month. On a three-day trade trip to Pennsylvania, Chilean energy executives not only celebrated the opening of the Chilean Philadelphia consulate with Pennsylvania Governor Tom Corbett, but they also discussed Chilean interests in Pennsylvania’s Marcellus shale gas. Chile, a country whose energy demand is growing at five percent yearly, is preparing for increasing energy consumption rates. Governor Corbett, having visited Chile last April, reiterated to the Chilean executives that he is happy to export Pennsylvania’s natural gas: “As Chile’s manufacturing sector grows, she is clearly going to need energy […] we have it in abundance and we’re blessed by that.”

The global shale boom, supported almost wholly by American reserves, has continued to shake up the positioning of the world’s energy producers. While other countries may move to avoid the fracking boom, most governments seem pleased with America’s progress. Europe may still have the opportunity to ease their reliance on Russian energy with new American natural gas imports; North American energy companies are starting to come back home, which could boost America job creation statistics; and countries are beginning to open consulates in what would otherwise be obscure states. The shale revolution has begun, and it’s a game-changer for global energy.

Should Food Fill Stomachs or Gas Tanks?

Under a new U.S. Renewable Fuels Standard (RFS) program, created by the Energy Policy Act in 2005, the US became the world’s largest producer of ethanol fuel. By 2007, a second government mandate, the Energy Independence and Security Act (EISA), was passed which expanded the RFS program requiring 36 billion gallons of renewable fuel be used by 2022.While corn ethanol is not directly outlined under these policies, 98% of the biofuels produced and blended into gasoline in the US originate from corn. This de facto directive for corn ethanol has had negative impacts on global food market prices. In 2012, we experienced the worst global drought of the last half-century. With the US being the world’s largest exporter of corn, and their mandated 40% allocation of its corn for ethanol use, the already pressured corn prices skyrocketed.

In the past decade, prices of oil and food have significantly risen to historic levels. Because of the inextricable link between food and energy markets, the grain market has experienced volatility over the past six years. As a commodity susceptible to weather, it is apparent how much recent climatic events have distorted global grain inventories. This consumption mandate has turned out to be the most significant driver of ethanol demand, corn demand and corn prices as we can see the global food crisis correspond with the US expansion of corn ethanol in 2007. Agricultural commodity prices broke record highs in ’07-’08, in ’10-’11, and again with the US drought in 2012.

The most ethically heated issue with the RFS mandate is that corn is diverted away from the global food supply and towards the US’ domestic energy chain. This policy has had harsh repercussions on developing countries, which spend a much greater portion of their income on food and energy than the developed world. While the world’s wealthy states can substitute higher priced foods from elsewhere, the world’s poor cannot. As a country that sends almost a billion dollars annually in food aid to help the developing world feed itself, why does the US divert food into their energy chain and consequently increase the global price of food? Is putting food in gas tanks an ethical energy policy, food policy, and foreign policy? Pitting food policies against energy policies is illogical and proving to be destructive, thereby increasing vulnerability to weather risks suggesting the EISA/RFS is an unpredictable law.

The RFS/EISA has become a source of debate amongst Americans: some want it repealed; others want it left untouched. There is, however, little discussion on what a repeal would look like apart from a complete shutting down of the policy. Phasing out the RFS year by year – effectually reversing the policy over time – could provide a concrete policy solution.

Powerful industries and advocates have been created under US ethanol production, and with the current rise in vocal opponents of the RFS, these industries and advocates sense a direct threat. Removing newly engrained policies is politically difficult. However, if the US were to phase out the EISA year by year, it would help mitigate the economic and political shock currently felt by corn farmers and ethanol reliant industries. Reducing US ethanol commitments over time, thus reducing the amount of corn in gasoline, would also help alleviate pressures on global food prices.

An emerging development in America’s energy landscape, that poses a legitimate challenge to the use of food in gas tanks, has been the discovery of significant new natural gas reserves. This immense supply has been identified and tapped, subsequently forcing US natural gas prices down to attractive levels relative to both oil prices and international natural gas spot rates. The security, predictability and location of this supply are by far superior to that of global oil.

Already there are industry efforts to convert engines to burn natural gas and establish infrastructure to distribute it. This will take time and investment but represent a kind of phase-in calendar that could offset the phase-out use of ethanol. Moreover, converting vehicles to natural gas would create jobs: drilling, distribution, infrastructure and conversion. It would not encroach on food supply, or on American foreign policy, other than to reduce a reliance on foreign oil.

While there are some environmental concerns, natural gas is the cleanest burning and most efficient of all hydrocarbons and offers an environmentally preferred alternative to higher carbon emitting gasoline. While understanding the recent moratoriums on fracking in certain US states, US shale oil expansion has OPEC members and Gazprom taking notice.

In an energy hungry world, America has the opportunity to phase out ethanol and phase in an abundant, available, cleaner and less expensive fuel that is more secure. It might alleviate pressure on energy for others worldwide, as a gallon of gas not consumed in the US becomes available to others. Moreover, it would return the use of corn to the food chain where it belongs.