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Sep 19, 2013 | 00:25 GMT

5 mins read

Looking for Signs of the U.S. Energy Revolution

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Despite a technological revolution that has allowed domestic U.S. energy production to skyrocket, many of the consequences discussed in the media — cheap gasoline prices, significantly less U.S. interest in the Middle East, etc. — will remain elusive. On Sept. 18, U.S. President Barack Obama told the Business Roundtable that ultimately, the concept of "energy independence" is a misrepresentation because of the global nature of the oil trade. But while consumers may not currently feel the effects of the U.S. energy boom, it could boost the U.S. economy for decades to come.

What is a Geopolitical Diary? George Friedman explains.

U.S. oil production for the week ending Sept. 13 was estimated to be 7.8 million barrels per day — the highest level since early 1989 — and the United States is producing more natural gas than ever. Moreover, oil production increases will continue and the United States could wind up producing more oil than it ever has as well.

Energy is used in numerous applications such as petrochemicals and heating, but it can broadly be broken down into two categories: transportation fuels and power generation. Power generation comes from many sources, including natural gas, coal, nuclear and renewables. However, 90 percent of U.S. transportation fuels are derived from crude oil. The United States is self-sufficient in coal and very nearly so in natural gas, but even taking Canada's oil reserves into account, the two North American countries are unlikely to produce more oil than they consume, keeping them tied to global oil supplies. 

Increasing oil production is only one part of increasing energy security for transportation fuels. Altering the makeup of transportation energy sources and changing the oil-based stranglehold on transport fuel is another important factor, albeit one that plays out over a longer period. Already, though, Tesla, GM and other companies are developing cheaper electric cars and car battery technologies that could eventually lead to a swap in energy sources from gasoline to electricity, which can be derived from a more diverse pool of sources.

In addition, South African energy company Sasol is contemplating building a plant in Louisiana that would convert natural gas into diesel and other products at a time when natural gas-powered vehicles are becoming more common. New standards on vehicles will also lead to increased fuel efficiency. Even demographics play a role, with fewer young people getting their drivers' licenses. 

None of these factors alone will result in a substantial enough shift to reduce American's reliance on oil, but collectively they could lead to the United States reducing its oil consumption by a third by 2040. Yet, domestic oil production might fall substantially by then, since many of the new fields that are currently being developed will likely begin declining in the 2020s. 

A more realistic prize for the United States, however, is independence in energy needed for power generation. This may have even greater geopolitical consequences than that of transportation fuel. Unlike oil, common energy sources for power generation are either expensive to trade (such as natural gas, where prices vary dramatically around the world) or unable to be traded (most renewable energy sources, including hydropower). This means those markets are inherently less susceptible to global market forces, contributing to cheaper domestic electricity prices for countries that possess energy in those forms. The United States falls into this category since domestic natural gas and coal production — which account for two-thirds of U.S. electricity — are plentiful and extremely cheap to produce. Indeed, by the early 2020s, the United States will be a net exporter of natural gas. (The United States already is for coal).

We have already begun to see the effects of increased security in power generation feedstock. Industrial electricity prices in most of the United States are less than half the EU average and a third of the price in Tokyo. And although it has only just begun, the trend of "reshoring" manufacturing back to the United States that had gone elsewhere will emerge over the next few decades. Rising labor costs in developing economies such as China will also hasten this process, since some companies will find that opening up a plant is more economical in the United States than abroad. Just as important, breakthroughs in robotics and other technologies that use electricity to produce goods will further magnify the impact of cheap electricity prices. Even more, increased natural gas production is expected to last much longer than increased oil production, lengthening the amount of time that the United States can take advantage of cheap domestic supplies.

The hopes for true energy independence to the point where the United States can isolate itself entirely from shifts in global energy markets are unrealistic. As the sole naval superpower in the world, the United States will remain interested in ensuring that the Strait of Hormuz remains open because of the consequences of closure would be catastrophic for the global economy. Additionally, even with significantly increased oil production, the United States will remain an importer of oil and a significant portion of oil imports will still come from the Middle East. 

Reducing the United States' reliance on foreign oil supplies may have some strategic benefits, but the United States will always be directly affected by global recessions and repercussions caused by global energy market instability. Increased energy security can blunt the effects of these repercussions, but its more important function will be helping to boost the U.S. economy. While energy is just one of a number of economic factors, its centrality to the modern industrial economy means other positive trends will only be enhanced by the United States' increased production.

Looking for Signs of the U.S. Energy Revolution
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