Energy Independence Edging Closer To Reality

August 2012, Vol. 239 No. 8

Carol Freedenthal, Midstream Editor

Whether U.S. energy independence is real or a mirage, the industry is getting closer to what one could call “energy independence”. Common belief is energy independence will bring many benefits such as better foreign trade balances, less support for countries not friendly to the U.S., more secure energy supplies, and most important, lower energy prices, especially for crude oil which is the raw material for transportation fuels.

No question energy independence will enhance trade balances, deny unfriendly countries much needed cash for their campaigns against our interests and provide a more secure supply of fuels. As far as lower crude prices that may be another question because what is forgotten is that crude oil, like all energy products, is a world commodity and regardless of the sources, prices vary because of many world conditions. With this understanding, energy independence may be more of a mirage than a reality!

While energy independence will not guarantee the price of transportation fuels at the pump, it would still be on a net basis, good for the country. The many benefits of a secure supply of energy sources benefit the country’s economics and security. And, while it cannot control the pump price, it definitely goes a long way toward helping prices stay reasonable and stable. The potential independence is based on more than just the supply side.

Conservation and energy savings play a big role in energy independence, especially in the transportation side where crude oil is the big energy source. Between cars and trucks having improved mileage per gallon of fuel and the high cost of gasoline impacting drivers’ pocketbooks, fuel consumption has fallen significantly in recent years. According to a recent article in The New York Times, “Just since 2007, consumption of all liquid fuels in the United States, including diesel, jet fuel and heating oil, has dropped by about 9%, according to the Energy Information Administration (EIA). Gasoline usage fell 6 to12%, estimated Tom Kloza, chief oil analyst at the Oil Price Information Service.”

Sadly, as much as independence might help, there are critics in the country against it. Mainly, these are the environmentalists who feel it will only further entrench fossil fuel use and that some of the current improved oil and gas recovery methods are harmful to the environment. The only problem is no one has come up with an economic and efficient substitute for fossil fuels.

Several European countries with big “green fuels” programs have given up. A recent newspaper article reported that a fleet in the U.S. Navy had gone green and was using only renewable fuels. A gallon of fuel was $26 vs. the going rate of $3-4 per gallon for fossil fuels like diesel or gasoline.

Looking at the total U.S. energy picture, which includes natural gas, coal, nuclear, crude oil and renewables, the country is close to being self-sufficient. Crude oil, the raw material for gasoline and diesel fuel needed for transportation, is the only energy source where the U.S. requires large quantities of imports. These have a large impact on the country’s trade balances and economics. And, more than a question of needing imports and economics, some of the countries supplying the crude are not the friendliest to the U.S. The money they gain from crude sales to the U.S. helps further these unfriendly actions as well as open a question of security of supply

Coal reserves in the U.S. are abundant and sufficient to meet demand for several hundred years but the overriding question is whether the environmentalists will achieve their goal of killing coal use. New coal-fired generating plants are a “no-no” and even some of the changes in the environmental regulations will shut down existing facilities. Coal plants are on the “endangered species” list.

Recent drilling and recovery methods, like those for liquid fuels, have improved to where natural gas supplies from the U.S. are more than adequate. At the beginning of the decade, gas reserves and potential supply were so low that huge investments were made in liquefied natural gas terminals to allow imports of LNG to supplement domestic supply.

With the changes in drilling and recovery methods, so much natural gas is available that the government is reviewing whether to allow exports of natural gas to Asian and European markets where gas prices are 8-10 times higher than U.S. wellhead prices.

Nuclear and renewables have nothing to do with supply. Environmental, safety, and economics govern these energy sources and control the growth to meet the country’s energy demands.

As mentioned, crude oil is the focus of independence. Major changes are occurring here for many reasons, on the supply and demand sides, to lessen the need for imports. For many years, U.S. crude oil production has decreased while demand has increased.

For over two decades, oil demand rose while U.S. oil production declined. To many, reaching “peak oil” meant the end of U.S. self- sufficiency in crude oil and liquid fuel supplies. While still dependent on supplementing U.S. supplies, the outlook has changed.

A new vision of supply is possible because of technical reasons – better drills to dig into some of the hardest formations and improved methods such as horizontal drilling that allow precise exploration in thin seams of oil- and gas-bearing formations. Now it is economical to develop different types of oil reservoirs such as shale deposits and deep offshore reserves. Additional technology changes such as hydraulic fracturing play a major role by making more oil and gas available at competitive prices.

The boom has just begun but already the benefits are plainly visible. Oil production in the U.S. was less than 6 million barrels a day in 2008 after reaching nearly 10 million in 1970. Imports reflect these changes – those from OPEC members have fallen more than 20% in the last three years, according to the Times article. The U.S. is now a net exporter of refined products. Total U.S. imports have gone from a peak of 60% of crude feeds to refineries in 2005 to 49% in 2010. A recent EIA forecast called for imports of 36% by 2035.

This is not a flash-in-the-pan happening. Some of the natural gas reservoirs being tapped are liquids-rich formations so it’s both a liquids and gas stream that is being developed. New producing fields such as in the Dakotas and elsewhere are adding to the recoveries from old oil-and gas-producing regions such as West Texas’ Permian Basin, the Gulf of Mexico, Alaska and others.

The potential of tapping the Canadian tar sands for up to an additional million barrels of oil a day can only add to meeting the goal of energy independence. The potential supply sources, economics and demand are there for the U.S. to fulfill its needs. Various forces opposed to fossil fuels will add to the challenge of reaching energy independence, but ultimately the real benefits will prevail.