Fuel to Burn: Now What?

The reversal of fortune in America’s energy supplies in recent years holds the promise of abundant and cheaper fuel, and it could have profound effects on what people drive, domestic manufacturing and America’s foreign policy

By JAD MOUAWAD | The New York Times | April 10, 2012

Jesse Lenz

Cheaper fuel produced domestically could reduce the cost of shipping and manufacturing, trim heating and cooling bills, improve the auto market and provide tens of thousands of new jobs.

It might also pose new environmental challenges, both predictable and unforeseen, by damping enthusiasm for clean forms of energy and derailing efforts to wean the nation from its wasteful energy habits.

But for Americans battered by rising gasoline prices, frustrated by the dependence on foreign oil, skeptical of the benefits or practicality of renewable fuels and afraid of nuclear power, the appeal of plentiful domestic oil and gas could far outweigh the costs.

Just a few years ago, the dominant theme in discussions about energy was of declining production and the fear of running out of oil. Even today, political tensions in the Middle East, particularly in the Persian Gulf, have fanned fears of supply disruptions that are keeping prices high.

But a new boom in energy production in recent years has upended these expectations in record time. High energy prices led to a wave of successful oil and gas exploration in North America, including in fields that were deemed uneconomical only a few years ago. Using techniques like horizontal drilling and hydraulic fracturing, oil companies are tapping into deeply buried reserves in shale rocks and in the ocean’s depths.

The surge in energy prices, along with a recession and new government rules that tightened fuel-economy standards, led to a sharp cutback in gasoline consumption. This decline in demand in the last five years reversed decades of almost uninterrupted growth that made the United States the world’s top energy consumer, accounting for one in every four barrels of oil burned around the globe.

The North American energy revival is primarily the result of so-called unconventional sources of energy — like shale oil and shale gas across the United States, oil sands in Canada and deepwater production in the Gulf of Mexico. In the last five years, the United States and Canada combined have become the fastest-growing sources of new oil supplies around the world, overtaking producers like Russia and Saudi Arabia.

“The transformation unfolding in North America represents a potentially decisive shift in the history of energy,” Rex W. Tillerson, the chairman and chief executive of Exxon Mobil, who is not usually given to hyperbole, said in a speech in Houston last month.

Ed Morse, head of global commodity research at Citigroup and a longtime energy analyst, says North America has the potential to become a “new Middle East.”

“The reduced vulnerability of North America — and the world market — to oil price spikes also has deep consequences geopolitically, including the reduced strategic importance to the U.S. of changes in oil- and natural gas-producing countries worldwide,” Mr. Morse said in a recent 92-page report called Energy 2020. ”Pressures towards isolationism in the U.S. will likely grow, with consequences for global stability that can only just begin to become understood.”

“The only thing that could stop this is politics — environmentalists getting the upper hand over supply in the U.S., for instance,” the report said.

The new supplies ensure that the United States will remain well entrenched in oil, but the continuing reliance on fossil fuels also carries significant environmental concerns — whether from the risk of offshore drilling, or the hazards, many still unknown, of hydraulic fracturing. It also means that greenhouse gas emissions will most likely increase, at least until carbon emissions are capped or new technology to store carbon dioxide underground is developed.

The glut of natural gas supplies cuts two ways on emissions. It has effectively put an end in the United States to any new investment in coal plants, which produce much more emissions. But it also makes the economics of alternative, noncarbon energy sources like wind power or solar power difficult to justify without public support and subsidies.

Regardless of the environmental impact, there is no guarantee that new supplies will inevitably lead to lower gasoline prices, as proponents of unfettered domestic drilling argue. Oil is a global commodity with a price set on the global market. With rising demand around the world, particularly in emerging economies, and instability in many oil-producing countries, many analysts predict global oil prices will remain volatile — and high — for many years to come.

And with gasoline prices above $4 a gallon, the nation’s energy resources remain a polarizing topic, pitting Republicans against Democrats, environmentalists against oil companies, and conservationists against advocates of unfettered drilling.

“It is remarkable how quickly perceptions have changed,” says Guy Caruso, the administrator of the United States Energy Information Administration from 2002 to 2008, who is now at the Center for Strategic and International Studies. “We may be in the early stage of this transformation, and clearly things could still go wrong.”

A terminal in Maryland may export natural gas. Brendan Smialowski for The New York Times

Energy production is an inherently risky business, but recent history suggests that when resources are available they end up being developed.

After the explosion of BP’s deepwater well two years ago in the Gulf of Mexico, leading to the biggest oil spill in American history, the Obama administration imposed a moratorium on offshore drilling. But it took only about a year for exploration and production to resume offshore.

Cheaper energy costs — particularly for natural gas — would benefit a variety of domestic industries, like chemicals, pharmaceuticals and fertilizers. The rise in natural gas production has already led many utility companies to shift their electrical production away from coal; it also calls into question talk of a nuclear revival in the United States.

Economists say that ample gas supplies might also provide the basis for a resurgence of American manufacturing, which has been battered by high energy costs for much of the last decade.

Natural gas prices have fluctuated wildly in recent years, rising to $14 for a thousand cubic feet from $2 within a few years. The current glut, however, has driven prices back down again, to near $2 for a thousand cubic feet.

With America becoming one of the top natural gas producers, some domestic companies might rethink moving parts of their business to countries with cheaper energy costs. (At current consumption rates, American gas reserves would last at least 75 years, an estimate some experts say is conservative.)

Lower natural gas costs would also have cascading benefits to other commercial sectors, like retailing. Shipping costs may be lower, particularly if transportation companies shift their fleets to natural gas-powered or electric vehicles. FedEx, for instance, has already been adding clean energy trucks to its fleet, including hybrid and all-electric delivery trucks in cities like Chicago.

Citigroup estimates that as many as 3.6 million new jobs might be created by 2020 thanks to the energy boom. The current trade deficit might fall by 60 percent by the end of the decade from today’s level, according to the bank’s estimates, and the dollar could appreciate by as much as 5.4 percent as imports shrink.

“In a world of high energy prices, the potential economic activity generated by this wave of new hydrocarbon production is extraordinary and should strongly boost national output, increase incomes, create wealth, stimulate consumption and create jobs,” according to Citigroup.

Given how swiftly expectations have shifted to describe America’s energy prospects, however, some caution may be warranted.

Opposition from environmental groups and concerns about climate change — which is caused by increased carbon emissions from fossil fuels — could lead to tighter regulation of petroleum products or derail infrastructure projects like pipelines.

That is what has happened to the extension of the Keystone XL Pipeline, which its supporters say is needed to increase the import of oil from Canada’s oil sands into the United States. That project has faced stiff opposition from environmental groups because oil sands are more energy-intensive and emit more carbon dioxide into the atmosphere than traditional oil sources.

The increased reliance on these unconventional oil sources, including oil sands and shale oil, has led some energy experts to talk about a “re-carbonization” of energy supplies if that reliance distracts from the need to develop renewable fuels.

“As we run out of conventional fossil fuels, we face some fundamental choices,” said Dan Lashof, the climate program director at the Natural Resources Defense Council. “Are we going to switch to cleaner energy sources, or are we going to switch to dirtier energy sources? That’s why the Keystone pipeline was so hard fought. It’s because we face a real fork in the road. And depending which way we go, solving our environmental problems might become impossible.”

Environmental groups are also concerned about the effects on underground aquifers of hydraulic fracturing — in which water under high pressure is used to break apart shale rocks to release natural gas.

While natural gas emits less carbon dioxide than coal when burned for electrical production, which has led producers to try to brand it as a “clean” energy source, it remains a fossil fuel that emits carbon into the atmosphere when burned. Because it is suddenly plentiful, and relatively cheap, doubts have been raised about future investments in renewable power sources that had been favored to replace coal.

“Cheap natural gas has delivered significant near-term environmental benefits, but it clouds the outlook for renewable energy,” said Trevor Houser, a partner at the Rhodium Group, an economic research firm. “Without an extension of current tax credits or adoption of new pro-renewables policy, wind power and other renewable energy sources will have a tough time competing with natural gas in the years ahead.”

Geologists have long known that shale basins across the country, like the Bakken field in North Dakota, Eagle Ford and Barnett in Texas, and the Marcellus in the Northeast, held tremendous oil and gas reserves. But energy companies had no economic way to collect them until new technology recently changed that.

Production from the Bakken region alone has gone from negligible quantities to 500,000 barrels of oil a day in just a few years. Production at Eagle Ford produced just 787 barrels in 2004. Last year, its production reached 30.5 million barrels, according to state regulators, and it is still growing. Natural gas production therewent from nothing to 243 billion cubic feet in just three years.

The National Petroleum Council, an industry-led group that provides advice to the secretary of energy, recently outlined its view of how the nation’s larger-than-expected resource might be developed.

In a major study released last year, the group forecast that North American oil production might exceed 20 million barrels a day by 2035 under a “high potential” situation of unfettered access.

However, under a “limited” situation where production was constrained for a variety of environmental or political reasons, domestic supplies might fall to less than 10 million barrels a day.

Some experts are more bullish. Mr. Morse of Citigroup forecast that North American oil production could reach an astounding 27 million barrels a day by 2020, almost twice the rate of production of 15 million barrels a day at the end of 2011. Production from the United States could grow to 15.6 million barrels a day by 2020, up from nine million barrels a day in 2011.

If that trend continues, the growth in oil and natural gas supplies in the next decades could turn the United States into a top energy exporter, rivaling some members of the Organization of the Petroleum Exporting Countries. Natural gas could be sold to Mexico and Canada (because exploiting oil sands is so energy-intensive, Canada might have to import natural gas to produce its oil). Refined petroleum products, and even crude oil, could find customers in Europe and Latin America. Coal could be exported to China.

With less gasoline demand, the nation’s surplus refining capacity means the United States is already exporting petroleum products — like gasoline and diesel. The United States is now the top exporter of refined products, just ahead of Russia.

The United States has been a net oil importer since the middle of the last century. America’s dependence on imports grew as the country’s consumption rose and domestic production dropped, and reached a peak in 2005. That year, domestic consumption of oil was about 21 million barrels of oil a day — a quarter of global oil demand. More than two-thirds of that was imported.

But this was most likely the high-water mark for oil imports, at least in the foreseeable future. The nation’s oil consumption has since fallen by about three million barrels a day as consumers cut back on their gasoline use.

Analysts say this trend is actually deep-seated, and is likely to continue. Americans are buying fewer cars, and they are driving shorter distances. The average distance traveled peaked at 12,500 miles a year in 2003, according to Citigroup, and could fall to 11,600 miles a year by 2020.

At the same time, federal fuel-efficiency standards are being tightened. The Obama administration and automakers last year agreed to new fuel-efficiency targets, aiming to raise the Corporate Average Fuel Efficiency, or CAFE, standard to 54.5 miles per gallon by 2025, with the goal of saving 12 billion barrels of oil over the life of the program.

Political attitudes, once hard and fast, are undergoing a transformation.

“For 20 years, Democrats opposed opening public lands to oil production and Republicans opposed increases in fuel economy standards, but the run-up in oil prices shattered all that,” said Paul W. Bledsoe, a senior adviser at the Bipartisan Policy Center, a research group in Washington. “The shift in politics was amazingly swift. As was the change in psychology, where the United States was viewed as an energy-depleted nation, to the view now of an energy-rich superpower.”

The rise in fuel efficiency in conventional vehicles, along with the growing popularity of hybrids, could also mean all-electric cars will struggle to gain much market share, according to a report released last year by the Boston Consulting Group.  In fact, the report found that by 2020, electric cars in the United States would account for a lower share of the market than in either China or the European Union, where they are likely to benefit from government support.

Assessing falling American dependence on foreign oil, analysts with the financial firm Raymond James said imports fell from 65 percent of demand, or 13.5 million barrels a day, their peak in 2005, to 9.8 million barrels a day in 2011, or 52 percent of demand. They predicted that imports would keep falling, reaching 4.5 million barrels a day — or just a quarter of domestic oil demand — by 2015. By 2020, they forecast, the United States would not need to import foreign oil anymore.

“The resulting savings from the standpoint of the trade deficit are highly meaningful,” the analysts said, “especially when the benefits of cheaper energy for domestic manufacturing are taken into account. Maybe the real question is, When will Washington apply to join OPEC?”

While the question is provocative, the change in outlook for domestic supplies, along with the changed role of the United States in global energy markets, carries important economic and geopolitical lessons.

Nationalism over natural resources in countries like Venezuela, Russia and much of the Middle East has increasingly forced Western oil companies to look for oil and gas closer to home. And exports are already shrinking for many OPEC producers as their own domestic demand soars — a result of energy subsidies that keep prices artificially low.

It is still too early to get a clear sense of the political implications of this reduced reliance on oil from places like the Middle East. Four of the top five sources of foreign oil to the United States are already outside the Middle East — Canada, Nigeria, Venezuela and Mexico. The fifth is Saudi Arabia.

James Brick, an energy analyst with Wood Mackenzie, a research firm, said in a recent report that by 2030 the United States could end up exporting 500 million tons of coal a year, 3.2 billion cubic feet a day of natural gas and 2.5 million barrels a day of oil products.

“The United States will be playing a very different role on the energy markets, a much more international role and a much more complicated and sophisticated one,” said Mr. Brick. “As with any forecast there are uncertainties but no matter how you cut it, the United States has the resources in the ground.”

© 2012 The New York Times Company

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