Monday, August 11, 2014

The U.S. Producing More Oil: A Panacea or Obstacle?

The International Energy Agency projected in 2012 that a shale-oil boom would catapult the United States over the state of Saudi Arabia as the world’s largest oil producer by 2020. In the words of the Wall Street Journal, the global energy map was “being redrawn by the resurgence in oil and gas production in the United States.”[1] Although the United States would benefit in the period from the trajectory, the drawbacks should not be ignored. In fact, the trend could be harmful in the long term if preparedness for a world without oil is put off as a consequence.

On the plus side, producing more natural gas in place of coal to generate electricity reduces carbon-dioxide emissions from what they would otherwise have been.  The IEA has projected that natural gas will displace oil as the largest single fuel in the U.S. by 2030. In 2012 alone, carbon-dioxide emissions were down in the U.S. from 2011. In the first eight months of 2012, natural gas accounted for 31% of electricity generation, up from 24% in 2011. The question of whether more black gold is a good thing, even if produced at home, is considerably murkier. 

Drill baby drill, an expression used by Republicans in the election campaign of 2008, contains the combination of some immediate benefits, but also some risks. On the one hand, American demand for oil would not be so dependent on states in the Middle East, and would thus have a freer hand in foreign policy, should a greater proportion of oil consumed in the U.S. be extracted domestically. Already in 2012, the U.S. received less than 20% of its imports from the Persian Gulf region, whereas China received half of its oil imports from there. This trajectory could give the State Department more bargaining power with major oil producers in the Middle East, and even free up the $60 to $80 billion a year being spent by the U.S. to protect the Middle East sea lanes.

At the same time, drill baby drill risks reducing the energy problem facing the U.S. to one of insufficient oil drilled within the country’s borders. In fact, focusing on drilling more may be counter-productive if there is too much oil being consumed as it is. The relatively narrow aim could frustrate efforts to rely more on “clean energy” sources. Even on its own terms, the trajectory of increased domestic production is not all that one might suppose at first glance.

Demand continues to exceed domestic production throughout the period.

Even with the additional domestic production, the domestic demand, even given its drop of 8.4% in 2012 to 18.9 million barrels a day from 2011, was still projected at the time to be more than domestic production even in 2020. This suggests that oil imports—expected to be four million barrels a day from 10 million a day in 2012—would still be material and thus relevant to foreign policy. Economically, extraction in the U.S. is relatively expensive, and the prices are set globally, so more domestic production does not necessarily translate into lower prices. Indeed, the continuing dependence of the U.S. on at least some foreign production would still put at least some upward pressure on the prices of oil. Even this is not so simple. American oil companies extract oil around the world. In fact, after being kicked out of Iraq in 1993, the companies were invited to bid for leasing contracts in the wake of the U.S. invasion—a turn of events that certainly invites speculation on the Bush administration’s motive for invading Iraq.

In the long run, less pressure to develop alternative sources of energy in spite of the gap could make the United States vulnerable to a “day of reckoning” when oil finally does begin to run out. After taking office in early 2009, President Obama used the perception of energy scarcity and increasing concern about global warming to urge members of Congress to pass legislation capping greenhouse-gas emissions and to spend billions of dollars on green-energy companies. The Republican majority in the U.S. House and rising fiscal deficits compromised the president’s ventures. Opening up more off-shore water to oil drilling was a much easier, bipartisan, route. The expected surge in U.S. oil production to 11.1 million barrels a day in 2020 allowed the president to mend some fences with the Republicans in Congress and their corporate sponsors. It is a truism of sorts that it is always in the interest of both parties that more jobs be created, even by oil companies. That such companies have so massive treasuries to draw on to lobby and contribute to political advertising via “social welfare” non-profits means that the truism is doubtless being reinforced rather than subjected to critique. Indeed, the reduction of the energy problem to a need to drill, baby, drill was no accident.

In short, the benefits of increased domestic production may be muted, even provided that oil drilling within the borders of the United States is so much different than the extractions by American oil companies overseas. Moreover, the sense of greater self-reliance “complacency” was already easing pressure to enact policy in 2012 to reduce global warming. The record melting of ice at the North Pole during the summer that year should have been a wake-up call, but it could easily be drowned out by the cheer, drill baby drill!  Such attention on domestic drilling could be just the tangent that the people in denial on planetary warming had been seeking to thwart such policy as per the short- and medium-term financial interests of the extant oil companies. It may be indeed difficult for a democratically-elected representatives to orient policy to a long-term benefit even when there is a tail-wind. The prospect of tremendous profits at America’s oil giants represents a formidable head-wind, which of course means that more fuel—or self-discipline—will be necessary domestically.

1. Benoit Faucon and Keith Johnson, “U.S. Redraws World Oil Map,” The Wall Street Journal, November 13, 2012.