(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON Nov 30 Booming output of gas and now oil from shale has raised the tantalising prospect of the United States becoming self-sufficient in energy, even a big exporter -- ending its dependence on imports from unstable places in Latin America, Africa and the Middle East, and giving a big boost to domestic manufacturing.
Following the deployment of horizontal drilling and hydraulic fracturing techniques in Texas' Barnett shale and elsewhere, the United States is now producing so much natural gas that the Department of Energy has granted Cheniere a licence to begin exporting liquefied natural gas (LNG) from its facility on the Gulf Coast.
The United States still depends on imports for 60 percent of the crude oil processed in its refineries, but the share has been dropping for the first time since the early 1980s. Rising domestic output, falling gasoline consumption, and the ethanol blending mandate have all cut the need for imported crude from Latin America and the Middle East.
Falling demand for petroleum-derived gasoline has brutally squeezed refineries along the East Coast, many of which depend on high-quality expensive crude oils from the North Sea, Libya and West Africa, and took a second hit when civil war halted Libyan exports.
But midcontinent refiners have taken advantage of cheap crude in the Midwest to boost output, while the sophisticated refineries along the Gulf Coast process cheaper poor quality crude oils from around the world to re-export as gasoline or distillate fuel to booming economies in Latin America and other emerging markets.
For the first time in decades, the United States has emerged as a net exporter of gasoline, diesel and other refined products, as the Wall Street Journal noted in a story on Nov 30 ("U.S. nears milestone: net fuel exporter").
The country already had the world's largest coal reserves. Following the shale boom, it now has some of the world's largest resources of unconventional gas and oil.
For the first time since the 1970s, when the United States began to import more than 50 percent of its oil needs, the country is on the brink of achieving the dream of energy independence. It is something that has been a key goal of legislators and conservative foreign policymakers since the Arab oil embargo in 1973 re-awakened fears about depending on other countries for such a vital strategic resource.
The last big energy bill, approved in 2007, which started off as the Clean Energy Act, and vastly expanded the ethanol mandate as well as tightening fuel economy standards and granting a range of subsidies for clean technology, was renamed the Energy Independence and Security Act (EISA), in not-so-subtle recognition of the top priority for lawmakers and the Bush administration.
According to supporters, large domestic reserves and rising output could transform the balance of payments (petroleum is the largest import cost) and relieve the United States from spending hundreds of billions of dollars and thousands of lives to secure access to foreign oil supplies in unstable and potentially hostile parts of the world.
But while the development of a bigger domestic reserve base and more production should cut the trade deficit and eventually lower oil and gas prices worldwide modestly, it will not insulate U.S. consumers and businesses from geopolitical risks emanating from the Middle East or unfriendly governments such as Venezuela and Ecuador.
Prices American consumers pay at the pump and for heating oil will still be set in global markets. The economy will remain vulnerable to increases and spikes caused by supply disruptions like Libya or unexpectedly strong growth in countries like China. Growing domestic supplies may blunt the impact but it will not disappear altogether.
PRICE OR PHYSICAL?
Proponents of energy independence often mix up two very different concepts of supply security: (1) physical availability of enough oil, gasoline and distillate to meet ordinary consumer and business requirements; and (2) ability to avoid sharp price increases that disrupt regular buying patterns and damage the economy. The first is related to rationing by volume. The second is related to rationing by price.
Both types of security were recognised in the 1975 Energy Policy and Conservation Act (EPCA) authorising the creation of a Strategic Petroleum Reserve (SPR) of up to 1 billion barrels "to reduce the impact of severe energy supply interruptions" (42 USC 77 6201(2)).
According to EPCA, the president may order the release of emergency reserves on making three findings: "(A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (B) a severe increase in the price of petroleum products has resulted from such emergency situation; and (C) such price increase is likely to cause a major adverse impact on the national economy" (42 USC 77 6241 (d)(2))".
Unfortunately, EPCA blends the concepts of physical and price disruption, which has been a source of confusion and controversy ever since when SPR releases are considered.
In most cases, price spikes rather than physical shortages have inflicted the damage, certainly since price controls were lifted. The gasoline shortages and queues of the 1970s have never been repeated. Nonetheless sharp rises have been blamed for triggering several sudden slowdowns in growth.
ONE GLOBAL MARKET
Even if U.S. oil and gas output increases substantially, the U.S. prices will still be set on international markets by the supply and demand balance at global scale.
The gas glut has temporarily pushed domestic gas prices well below international levels. But once Cheniere and others have secured permission and built their LNG export terminals, prices will start tracking international markets again.
The situation in oil is different. U.S. law bans the export of domestically produced crude oil. In any event, domestic production is still less than 6 million barrels per day, while the country needs to import a further 9 million barrels per day to meet demand. Even if the tight oil boom spreads from North Dakota nationwide, it will not be able to eliminate the requirement for imports any time soon.
U.S. refiners will continue to compete with processors in Europe, Asia and the rest of the world for crudes from the Middle East, Africa and Latin America.
Imports will still set the price for the marginal barrel of oil, and that will in turn set prices for domestically produced crude as well as refined gasoline and heating oil. In 2011, when U.S. crude prices decoupled from international benchmarks such as Brent, U.S. gasoline and diesel prices tracked the Brent market, not prices for cheaper and more plentiful WTI.
The only way to break the link between U.S. and international prices, and achieve true supply security, would be to achieve both domestic self-sufficiency and ban exports. Neither is likely to happen.
U.S. oil output will not rise that much in the foreseeable future. If it did increase 9 million barrels per day, enough to replace all imports, the resulting crash in global oil prices would promptly render much of the tight oil industry uneconomic and result in widespread closures. The oil market could not accommodate such a big supply increase so quickly.
Nor will the U.S. sustain an export ban. The old prohibition on gas exports has withered in the face of intense lobbying from gas producers anxious to secure higher prices. The United States continues to ban crude exports, but refined products are being freely exported in increasing amounts, which is equivalent to the same thing and ensures U.S. gasoline prices (net of taxes) are linked to those paid in Latin America and Europe.
Rising U.S. oil and gas output can contribute to supply security, but at the global level, where it will reduce U.S. pressure on world markets and improves the worldwide supply-demand balance. It could have a significant impact on the price of energy worldwide by boosting supplies. It could also have a beneficial effect on the balance of payments and domestic employment.
What it will not do is achieve "energy independence". The U.S. will still be projecting military force in the Middle East and other trouble spots 10 years from now, even if the miraculous increase in oil from the Bakken can be replicated across the rest of the country.