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U.S. can't drill way to energy independence

In his State of the Union address this week, President Barack Obama talked about the U.S. quest for energy independence.

"After years of talking about it, we're finally poised to control our own energy future," the president said. "We produce more oil at home than we have in 15 years."

Recent reports by the U.S. Energy Information Administration, the International Energy Agency, ExxonMobil and BP have suggested that the United States could possibly become the world's largest petroleum producer by 2020.

Improved drilling technology, particularly horizontal drilling and hydraulic fracturing, or "fracking," would undeniably create a surge in natural gas from regions such as Texas and Pennsylvania, and oil production from Texas to North Dakota and Montana. So wouldn't all this new oil and gas make us independent of global oil dynamics?

It's not that simple.

No increase in U.S. production will eliminate the importance of the Middle East and other major oil suppliers. In fact, projections indicate that the Organization of Petroleum Exporting Countries, or OPEC, will continue to provide 40 percent or more of the world's supply, and this share is likely to grow, not shrink. The United States, along with the world's developed and emerging economies, will have an interest in reliable energy supplies from the Middle East and elsewhere for the foreseeable future.

Because oil is transported easily and cheaply, oil produced anywhere in the world will go to the highest bidder, no matter where it came from. As a result, importers in Galveston, Texas, pay roughly the same amount per barrel as their counterparts in Guangzhou, China. When importers in Guangzhou need more oil, the increased price they pay is reflected at terminals from Louisiana to Laos.

Increased U.S. oil and gas production brings more jobs and other economic benefits. But even if the United States produced all 19 million barrels it uses daily, it wouldn't be free of the global forces surrounding oil.

As long as energy-hungry economies in Asia and elsewhere continue to grow rapidly, the United States will face prices pushed higher by global demand, which could reach 100 million barrels per day by 2020. And while daily U.S. oil production may grow by a substantial 3 million barrels or more during this decade, that's an increase of only 2 percentage points in the United States' share of daily global supply — from 11 to 13 percent.

An increase of this size, while consequential, will not be the key determinant of global oil prices. OPEC nations, fearing a collapse in export revenues, have indicated they may decrease production to maintain prices. While the United States may soon produce more petroleum than Saudi Arabia, it will not become the "new Saudi Arabia." Privately owned U.S. companies produce as much oil as is profitable at prevailing prices.

In contrast, spare production capacity and relatively low production costs give Saudi Arabia a degree of control over prices that the United States does not and will not have. That spare capacity can be quite helpful in times of supply disruption, but at other times it signals that production is being withheld to maintain prices.

So if OPEC has an interest in maintaining prices higher than many would like, and if the United States imports only about 10 percent of its oil from the Middle East, why does the United States spend so much on securing global shipping lanes and key oil supply sources? Because a disruption to one is a disruption to all.

If, for example, the Strait of Hormuz were blocked — stranding 17 million barrels of oil each day — the resulting price spike wouldn't just hurt nations like China that import a growing share of oil from the Middle East. Prices would jump and economies would suffer worldwide. Oil produced anywhere, whether in Iraq or North Dakota, would become more valuable, thereby increasing prices for U.S. consumers.

While the United States will produce more oil and gas, we cannot drill our way to energy independence. Yet, we can reduce our exposure to energy risks by increasing energy efficiency and, as the president noted in his address, we can increase energy resilience by diversifying our options through research and development of alternative fuels and technologies. In addition, we can enhance energy security by supporting a robust network for transporting energy and through diverse, competitive world energy trade that fosters the proper pricing of energy.

These approaches may not always be simple. But they are the key to our energy security.

Richard G. Newell is the Gendell Professor of Energy and Environmental Economics and director of the Duke University Energy Initiative. He is the former administrator of the U.S. Energy Information Administration. This essay was first published in Florida in the Tampa Bay Times.

U.S. can't drill way to energy independence 02/14/13 [Last modified: Thursday, February 14, 2013 3:55pm]
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