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Real Energy Independence Is An Illusion

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Real Energy Independence Is An Illusion

Authored by Anes Alic via OilPrice.com,

Ultimately, energy independence is an illusion in the era of globalization because the hyper connectedness of the market makes it impossible. Still, it’s a never-ending battle cry that ends up being an argument of semantics, the outcome of which depends on how you define “independence”.  

America’s ongoing oil and shale boom has reignited the debate about something that the nation had long come to consider a far-off dream: energy independence.

The notion that the country could become self-sufficient by producing enough energy to sustain the entirety of its population and industries was first floated by Nixon when he declared war on foreign oil during the oil crisis of the 1970s. 

It was later popularized by Bush in a state of the union address in February 2006 when he decried United States’ addiction to oil, which is often imported from unstable parts of the world before announcing plans to break this addiction by developing several alternatives, including a multibillion-dollar subsidized ramp-up of biofuels. 

Bush went on to boldly declare that by 2025, America would “…make our dependence on Middle Eastern oil a thing of the past” by cutting imports from Gulf states by three-quarters.

Well, it turns out the former president was prescient on some key predictions, which in hindsight appears quite remarkable when you consider that back then, the shale industry was barely on its feet. The shale era now is in full swing, with Trump, uncharacteristically, preferring to describe it using the somewhat less boisterous moniker of a “new era of American energy dominance”.

But the devil is in the details in any discussion as to whether America is any closer to true energy independence than during Nixon’s time or whether it is a populist charade masquerading as an energy strategy. There’s a third option, too: It’s simply misunderstood. 

Net Oil Exporter

For many years, the United States has been the leader in the $6 trillion global energy market, and is currently the world’s largest oil producer accounting for about 18 percent of global oil supply. But it has also been a leading importer of energy with foreign markets supplying about 20 percent of its needs.

However, the country recently achieved a key tenet of energy independence: becoming a net exporter of petroleum – which includes crude oil and petroleum products. In 2019, the US became a net petroleum exporting nation for the first time in 75 years with the latest data by U.S. Department of Energy (November 2019) showing that the country exported around 750,000 b/d more than it imported – the third consecutive month it did so.

But this ‘net exporter’ tag comes with an asterisk: US crude oil imports, specifically, averaged 5.8 million b/d in November vs. 3.0 million b/d for exports with the US Gulf Coast being the only region that exports more crude oil than it imports.

Indeed, US crude imports have remained stubbornly high even during the shale boom thanks to healthy domestic demand. US crude oil production has shot up 160 percent to over 13 million b/d since the advent of the shale era; meanwhile, domestic demand has remained flat but very high at 19-21 million b/d.

In 2019, the country still imported 9.1 million b/d of petroleum and other liquids, with 6.8 million b/d of those being crude oil, due to constraints such as regional supply/demand imbalances, infrastructural challenges and other factors. Further, many of the refineries in the United States optimized to process the heavier crude grades from Canada, Venezuela, and Mexico instead of the lighter, sweeter oil crude from its own shale fields. 

Source: EIA

The main consolation here is that a bigger proportion of its oil imports have been coming from its northern ally with crude imports from Canada clocking in at 134 million barrels in 2019 from 76 million in 2008. As Bush predicted, the United States is no longer as heavily reliant on OPEC for its oil, with the cartel supplying less than 30 percent of imports.

Sensitivity To World Oil Price Swings

True energy independence, however, goes beyond the mere supply-demand equation.

True energy independence means that the United States not only supplies all its oil needs but also that its oil markets are inured from disruptions by events in foreign markets. In other words, the Department of Defense and the American consumer should no longer be at the mercy of global energy price swings.

The reality here, however, is very different. This often hits home when major supply/demand shocks, such as the Saudi drone attacks, occur. 

Although one could certainly argue that the shale boom has watered down OPEC’s influence, offering a level of insulation against price shocks when OPEC restricts output, the United States has hardly separated itself from the world’s energy stage.

Oil prices spiked 20 percent in the aftermath of the attacks and remained 10 percent higher for weeks despite Saudi Arabia having enough reserves to last several weeks and quickly restoring production. As the Times noted, had this attack happened a decade ago, oil prices would probably have spiked way higher and rocked the global economy. Still, it was a stark reminder that energy sources like oil, coal and natural gas just cannot hide from global fluctuations.

The basic problem here is fungibility. Whereas there are no shortages of barriers to free trade across the globe ranging from tariffs and legal sanctions to the more practical problems of price and infrastructure, consumers of fossil fuels are generally able to access them from producers from all over the globe. The US produces 18 percent of the world’s oil and as such, it has some clout to sway global markets, but it is only one moving part that affects the remaining 82 percent of the world’s oil supply.

The only way to be truly independent of these risks is by not using these energy sources at all – by going green.

Renewable energy sources such as solar have their limitations, too, since they require special elements and metals such as gallium, indium, tellurium, neodymium, europium, yttrium, terbium and dysprosium that frequently have to be imported or mined domestically at great environmental costs. But unlike fossil fuels, these elements are not the energy source itself but rather part of the tech that makes them possible and can therefore be substituted and replaced through innovation.

In the final analysis, all this talk of “energy independence” and ” energy dominance” is all about becoming the masters of our own fate. This is something that we clearly cannot achieve when still relying on fossil fuels for the bulk of our energy, and going entirely green is the closest we will ever get to true energy independence.


Tyler Durden

Sun, 02/16/2020 – 19:05


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About The Author

Tyler Durden

Zero Hedge's mission is to widen the scope of financial, economic and political information available to the professional investing public, to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become, to liberate oppressed knowledge, to provide analysis uninhibited by political constraint and to facilitate information's unending quest for freedom. Visit https://www.zerohedge.com

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