False sense of energy security a risk of US oil boom-council

Mon Dec 3, 2012 12:00am EST

* U.S. still has 'excessive reliance on oil'-report

* Producing more helps, but also needs to slash use

* Government needs to spur electric, natgas vehicles

* Caution warranted for natgas export decision

By Roberta Rampton

WASHINGTON, Dec 3 (Reuters) - A surprising U.S. energy production windfall puts the country at risk of ignoring the urgent need to transform its transportation sector to depend less on oil and more on electricity and natural gas, a high-profile group of chief executives and retired military brass warned on Monday.

No matter how much oil is produced domestically, the U.S. economy is vulnerable to the risk of global price shocks caused by unrest or production cuts in the Middle East, they said.

"We caution that the situation has not fundamentally changed, and that it would be dangerous to allow a false sense of security to result in complacency and inaction," the nonpartisan Energy Security Leadership Council said in a report on Monday.

The recommendations come as Washington searches for ways to boost revenues and cut spending to address the massive U.S. debt without hurting the economy, which continues to bump along at a low rate of growth.

Against that backdrop, the energy sector has been a rare bright spot, boosting jobs, giving new life to the manufacturing sector and contributing to government coffers.

Production surges have been so strong that the United States is on a path to overtake Saudi Arabia as the world's top oil producer by 2017, and will be close to self-sufficient in energy by 2035, the International Energy Agency forecast earlier this month.

But the council warned that because of its "excessive reliance on oil," U.S. energy independence is "meaningless from a practical standpoint" because oil prices are determined globally. That means the United States could struggle to increase economic growth with regular oil price spikes.

The council is led by retired General P.X. Kelley, former Marine Corps Commandant, and Frederick Smith, chief executive of Courier delivery giant FedEx Corp whose business is highly sensitive to transportation costs.

They are to discuss their recommendations at a public event on Monday with Gene Sperling, a top White House economic policy advisor and a player in current fiscal talks, as well as Republican U.S. Senator Roy Blunt of Missouri.

STREAMLINE REGULATION

The council urged the administration and lawmakers to take steps to spur more energy production, including revising the five-year offshore drilling plan, and overhauling the bureaucracy for permits for major energy projects - drilling, renewables, transmission lines and pipelines.

"Today, regulation is too often an opaque process that serves to dissuade private sector investment through practically unlimited delay," the council said.

It recommended that the White House Office of Information and Regulatory Affairs be responsible for overseeing permits for major energy projects, establishing a 30-month total timeline for federal reviews of projects.

Currently, projects can be held up for years in an interagency process before the government makes a decision. Backers of the Keystone XL oil pipeline, for example, first applied for a government permit in 2008, and still await a decision.

UNFORESEEN EFFECTS OF ENERGY EXPORTS

But the council said a cautious approach is warranted for a tricky decision which could come next year on whether the United States will allow more exports of liquefied natural gas (LNG).

More LNG exports could make domestic natural gas prices higher or volatile, but at the same time could improve the U.S. trade balance and strengthen the dollar, it said.

Expanded U.S. LNG exports would tend to displace exports and lower prices for Russia and Algeria, which count on export revenues. That could contribute to instability in those countries, the council said.

"The decision that policymakers make on the question of LNG exports will have very significant - though not always clear - impacts on the U.S. economy, our strategic interests, and the overall geopolitical landscape," the council said, noting it plans to release a full analysis of the issue in mid-2013.

ALTERNATIVE FUELS

The council praised new fuel economy standards finalized in August by the Obama administration as "the most important progress on energy security in decades" because they will slash oil consumption.

But it said the government needs more investment in research to reduce the cost of electric and natural gas vehicles, and must provide incentives for building refueling infrastructure to make consumers more comfortable buying them.

The Obama administration plowed $2 billion into grants for battery makers in its first term, but the industry has faltered because of weak demand, and Republicans have panned the government's loans and grants for "clean energy" as wasteful.

"Policy needs to be reoriented away from an approach that has thus far largely emphasized supply-side subsidization through grants and loans to individual companies," the council said.

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