Energy independence won’t guarantee low prices

WASHINGTON – On the presidential campaign trail, both Mitt Romney and Barack Obama have vowed to break the United States free of foreign oil, offering a pledge of at least North American “energy independence.”

In some ways, that’s an easy promise to make. No matter who resides in the White House for the next four years, the United States is already on a trajectory to derive much of its oil and all of its natural gas from within its own borders, thanks to technologies allowing energy companies to harvest the fossil fuels from dense rock formations.

Tied to global market

But abundant domestic supplies don’t guarantee a drop in the cost of energy. Oil prices are set on a world market, subject to a complex mix of factors outside the United States’ control. And even if net U.S. or North American oil imports plummeted to zero, the United States would still be connected to that global market.

Michael Levi, a senior fellow for energy and the environment at the Council on Foreign Relations, argues that the notion of real energy independence requires more than just “impressive arithmetic”: It isn’t just adding up total imports and exports to get to zero.

“So long as you are part of a global oil market, your economy remains vulnerable to unrest in that market – even if you are buying oil from yourself,” Levi said.

For instance, OPEC countries could cut their production to offset any spikes in U.S. oil – a scenario even bullish analysts anticipate.

“There will be times when OPEC may respond and cut production and that will temporarily pop up the price again,” said analyst John Freeman, managing director of Raymond James & Associates.

Romney unveiled his energy plan last month in a 21-page white paper that promises “North American energy independence by 2020,” largely by expanding offshore drilling, relaxing environmental regulations and putting states in control of permitting energy projects on federal land within their borders.

Obama’s energy approach would combine support for renewable fuels and alternative power with domestic oil and gas production. Obama also has broadly touted the promise of newly available natural gas supplies.

Prices likely to rise

Regardless of who is president the next four years, the United States is likely to pursue policies that would curb the pricing advantage for American energy.

For instance, Romney has pledged to sign off on the proposed Keystone XL pipeline that would deliver crude from Alberta to refineries along the Gulf Coast, while simultaneously freeing supplies now trapped in the Cushing, Okla., oil hub.

The dearth of infrastructure between Cushing and the Gulf Coast is one reason West Texas Intermediate crude is trading at roughly $17 less per barrel than Brent, the international benchmark.

“That’s solely because of a lack of pipeline capacity,” noted David Hughes, a geologist and fellow at the Post Carbon Institute. “People who think Keystone XL is going to increase U.S. energy security and lower prices should think again, because as soon as Canadian oil daylights to the Gulf Coast, it can command world prices.”

Even the surge in domestic natural gas production doesn’t guarantee costs will remain low. The government’s Energy Information Administration forecasts that the United States will be producing more natural gas than it uses by 2022, but energy companies and analysts widely say current prices – between $2 and $3 per thousand cubic feet – are unsustainably low.

The Obama administration is considering allowing more companies to liquefy and export natural gas, effectively putting the fossil fuel on a world marketplace for the first time and almost inevitably sending domestic prices up.

Creating new jobs

Both Obama and Romney have touted increased energy development as a way to rev up the U.S. economy and create jobs.

Daniel Ahn, chief commodity economist at Citi, predicts that new U.S. oil and gas production could add between $200 billion and $300 billion in revenue, stimulate many hundreds of billions more in economic activity and create 2 million to 3.5 million new jobs.

The surge in drilling in North Dakota, Ohio and south Texas has been made possible by horizontal drilling and hydraulic fracturing techniques that free natural gas and oil from dense rock formations.

The crude extracted from the Bakken formation in North Dakota, the Eagle Ford shale in Texas and other unconventional oil plays has enabled the U.S. to reverse a nearly four-decade-long decline in domestic production.

“By opening the door to vast resources of unconventional liquids, and, of course, natural gas too, the industry has radically reshaped the trajectory of U.S. oil production,” said Raymond James analysts in a report that was the foundation for much of Romney’s proposal.

Citigroup forecasts that by 2020, the United States will be producing 15 million barrels per day of liquid fuels, up from 5.6 million barrels per day last year. Raymond James predicts net oil imports to essentially reach zero by 2020, based on more biofuel, declines in demand and boosted domestic crude production.

But not everyone’s convinced.

Even under the most bullish forecasts, the United States’ thirst for energy eclipses what the country is able to produce.

The government’s Energy Information Administration – which has at times been criticized as too optimistic – projects that while U.S. crude production will climb for much of the next decade, it will peak at 6.7 million barrels per day in 2020. By 2035, according to the EIA, the United States will be producing just 6 million barrels per day and importing 36 percent of the oil it consumes.

Declining plays

Other energy analysts say the optimistic forecasts ignore the rapid decline rates from hydraulically fractured wells.

“You almost always find the biggest and best stuff in the beginning. The longer you are in the basin, the smaller the fields and the more expensive it gets to produce,” said Art Berman, a Sugar Land energy consultant. “People are forgetting that.”

Wells in the Bakken and Eagle Ford formations generally produce a lot of oil initially, but that starts dropping fast.

Berman, oft-criticized by the industry, and Hughes estimate decline rates of about 40 percent – which means just keeping production flat requires drilling hundreds of new wells each year.

Berman suggests that the question isn’t whether the U.S. has enough oil to become energy independent, but at what price.

“It’s tremendous we are producing more oil than we have in a couple years,” Berman said. “At the same time, we have to be realistic about what the costs are to do this and how sustainable it is.”

Even under the most bullish forecasts, the United States’ thirst for energy eclipses what the country is able to produce.

According to the EIA, the United States consumed 18.8 million barrels per day of refined petroleum products and biofuels in 2011 – about 22 percent of world consumption.

Much of that goes to fuel the nation’s cars and trucks. Even with new Obama administration fuel economy standards that would nearly double average gas mileage for passenger vehicles to 54.5 miles per gallon by 2025, the transportation sector drives U.S. demand for oil.

“Our vulnerability stems primarily from the fact that we consume a lot of oil, not from the fact that we consume a lot of imported oil,” Levi said.

jennifer.dlouhy@chron.com