The Fuse

U.S. Energy Security Problem Is Not Solved

by Matt Piotrowski and Paul Ruiz | March 08, 2018

A recent opinion piece in The Washington Post by Charles Lane raises questions about U.S. energy security and the country’s role in the global oil markets. Lane paints a rosy picture, arguing that due to the rapid rise in shale production, reliance on petroleum is not a national economic and security threat. However, rather than slip into a false sense of energy security complacency, it is important to remember that oil remains a strategic vulnerability for U.S. consumers and businesses. The sharp rise in U.S. domestic production has undoubtedly helped reduce our nation’s oil import burden, but these changes do not mean the U.S. economy is invulnerable to global supply outages or price shocks.

The weak oil price environment of the past few years has discouraged oil companies from sanctioning the necessary investments in future capacity.

Although domestic production has continued to rise since the beginning of the decade, the situation is forecast to significantly change in coming years. The weak oil price environment of the past few years has discouraged oil companies from sanctioning the necessary investments in future capacity. Total investment in new supply fell by 25 percent in both 2015 and 2016 and was flat last year. Earlier this week, the International Energy Agency (IEA) warned of higher global oil prices if conventional supply investment does not rebound quickly. Other analysts have said that for the oil market may enter a “decade of disorder” after 2020, when the world will need approximately 5 million barrels per day (Mbd) of new supply annually to compensate for the natural decline of existing fields and global demand growth.

Besides a sharp decline in investment, risks will likely spread because of rising consumption in emerging markets, increased reliance on OPEC as it consolidates power with other producers such as Russia, and destabilizing geopolitical events. A return to triple-digit oil prices, a strong possibility, would threaten economic growth and could precipitate a recession. This is why supply- and demand-oriented solutions, including increased domestic drilling, modernized fuel-efficiency standards, accelerated adoption of advanced fuel cars, and a smooth transition to autonomous vehicles, are essential and pragmatic policy proposals.

Lane asserts: “Rather than being at the mercy of foreign potentates, the United States may now be the world’s ‘swing’ producer of crude.”

The U.S. is not a swing producer.

The U.S. is not a swing producer. As the IEA pointed out this week, although the U.S. will become the world’s top crude oil producer, Saudi Arabia will remain the swing producer—it is the largest exporter and the only producer holding a significant amount of spare capacity. Although tremendous investments in U.S. shale oil have helped increase the sector’s production efficiencies and reduce costs, the average breakeven price for American shale oil producers is much higher than Saudi Arabia’s. Rystad Energy estimates U.S. shale oil breaks even at $36, compared to $10 in Saudi Arabia. Due to volatility in global oil prices, U.S. domestic production fell by a massive 1 Mbd as recently as 2015-16, a decline that could occur once again. In addition, decline rates for shale plays are much sharper than for conventional fields.

Booming domestic production gives Washington “strategic weapons once unthinkable.”

The U.S. is still involved in the Middle East because of non-oil interests. To reduce the ever-present physical and virtual risks to oil supplies, the U.S. military spends billions of dollars each year safeguarding major transit thoroughfares and patrolling maritime chokepoints. A 2010 Princeton University study estimated that the United States had spent more than $8 trillion patrolling oil cargoes in the Persian Gulf since the aftermath of the Arab Oil Embargo in 1973. We will continue to spend in this area since supply outages affect U.S. consumers and our allies.

The U.S. indeed has more freedom to use oil-related sanctions, but policy choices remained constrained. For instance, U.S. sanctions currently against Venezuela have not cut off oil imports despite the country’s deterioration and undemocratic shifts.

In 2017, the U.S. imported approximately half as much oil from the Persian Gulf as it did in 2000; not too shabby.

The U.S. still imports 7.8 Mbd of crude oil, underscoring our vulnerabilities to fluctuations in global prices, with 40 percent coming from OPEC, which is currently reducing output to increase prices. Since the 2003 oil price spike, American consumers have sent more than $1.5 trillion back to OPEC governments, which do not share U.S. strategic priorities.

…Higher gas-mileage standards for cars—established in the Energy Independence and Security Act of 2007, which a Democratic Congress passed, the Republican Bush signed, and most Americans soon forgot, played a far smaller role.

Higher fuel economy has been an extraordinary achievement.

Higher fuel economy has been an extraordinary achievement. U.S. vehicle miles traveled (VMT) has soared in recent years, but total oil demand is still below its peak reached in 2005. That is in large part attributed to improved efficiency. Not only have stricter standards helped cap demand and reduce import dependence, they have saved consumers billions of dollars at the pump. Since the U.S. still consumes one-fifth of the world’s oil, more demand-side measures need to be taken.

Environmentalists should make the case for reducing fossil-fuel use on its own green merits, rather than in tough-guy national-security terms.

Shale may have reduced vulnerabilities for now, but wars and internal strife in oil-producing countries continue to affect prices and therefore compromise national security. See Venezuela, Libya, and Nigeria. OPEC nations hold more than 80 percent of global proven crude oil reserves.

As for energy independence: It turns out we can drill our way there. The facts are clear.

The U.S. is not energy “independent.”

The U.S. is not energy “independent.” For the U.S. to completely insulate itself from the global oil market with demand at current levels, domestic production would have to grow at the current pace for another eight years. That seems highly unlikely. In fact, the IEA forecasts production to rise by just 100,000 barrels per day in 2023, a small fraction of what we saw last year. Demand needs to decline to achieve true energy security. The shale revolution has been a remarkable asset, but it does not give reason to dismiss concerns about consumption, and the risks oil poses to our economic and national security.