New Year’s Message to Congress on U.S. Energy Independence and Exports: Do No Harm

When asked about the Republican agenda for 2015, U.S. Senate Majority Leader Mitch McConnell (R-Ky) is promising a “full-throated” debate on national energy policy. That worries me because ultimately, our energy situation is already moving in the right direction. U.S. oil imports have tumbled to their lowest levels in 16 years, with oil from the Organization of Petroleum Exporting Countries (OPEC) losing significant market share. As I explain in a newly published Special Issue on “U.S. Energy Independence: Present and Emerging Issues” in the journal Energy Strategy Reviews, after decades of dwindling energy supply and rising oil and gas demand, the United States finds itself in a new strategic position.

The public is now well aware that technological innovation and new investment strategies by U.S. independent oil companies are bringing about a renaissance in U.S. domestic oil and gas production that is making a substantial contribution to the prolific U.S. energy supply outlook. The oil boom is equally matched by technological progress on solar and wind energy, which are seeing dramatic gains in new installations at significantly falling costs. But we also need to recognize that there is a second piece to the energy independence puzzle. Three decades of policies designed to curb oil demand and growth in transportation fuel use are finally paying off. U.S. oil consumption has fallen about 10% between 2005 and 2013 and deeper reductions are expected in the coming decades. In our “full-throated” debate, we need to stay the course on both sets of policies. Without forward looking policies that constrained U.S. energy demand, all our big energy production boom would have done would have been to meet incremental demand, holding us in the same place as prior decades with deep dependency on OPEC and Russia in the driving seat.

As U.S. Energy Information Administration analysts Shirley Neff and Margaret Coleman demonstrate in the Special Issue in an analysis of the U.S. long term supply and demand outlook, US oil demand is expected to decline by more than 20 to 30% in the next twenty years. Neff and Coleman show with concrete data and analysis that smart policies that would keep current U.S. oil production and demand trends on track can allow U.S. supply and demand to equilibrate in the coming decade, bringing the coveted energy independence.

Keeping our current policies in place means that we could have the luxury to expand our energy export activities and still enjoy low prices. Expanding our exports can keep OPEC on the run. As Scott D. Sheffield, chairman and chief executive officer of U.S. independence oil and gas producer Pioneer Natural Resources, explains in the Vision article that opens the Special Issue, the ban has outlived its usefulness and now threatens to reduce U.S. production because a looming mismatch in the quality of oil being produced in the United States and the kind of oil needed for processing. This mismatch means that domestic output cannot find buyers from within the domestic oil refining industry. He calls on the United States to lift the ban, quoting a Brookings Institution study that concludes that allowing U.S. crude oil to go to “the refineries that can best process it most efficiently, whether at home or abroad, is in the broad (US) national economic interest.”

The U.S. export ban was passed at a time when more than 30 years ago, the U.S. Congress decided it needed to act to keep domestically produced oil at home, in the face of what it believed would be a permanent scarcity of supply. We are currently facing the opposite prospect. A glut in global oil and gas markets is threatening the possibility that U.S. domestic supply may have difficulty finding a market outlet, lowering the commercial drive for companies to maintain high investment and drilling rates critical to keeping U.S. oil and gas import rates low.  U.S. shale resources may be expensive compared to Saudi oil fields but not in the hierarchy of worldwide production. Operating costs for many locations in U.S. unconventional plays is below $10 a barrel, with some oil fields as low as $4.00 a barrel such as in some areas of the Eagle Ford and natural gas fields such as areas of the Marcellus as low as $1.00 per mcf. All-in U.S. unconventionals’ breakevens are varied but many areas have capital cost structures below $50 a barrel, meaning that U.S. producers won’t be the ones to lose in an international market price war. Given the importance of the U.S. shale play to the economy and U.S. foreign policy, why are we continuing to fetter U.S. oil and gas production with an export ban that makes it harder to find a buyer?

The argument that we need to hoard our production in case of war makes no sense. The United States is part of the International Energy Agency (IEA) emergency oil sharing system. In the case of war or a major global disruption of supply, the United States is bound by its IEA membership (and practical concerns as well) to share its oil with allies in the industrialized countries. Hoarding our supplies “under the ground” in normal times is not a substitute for a better policy for times of crisis. As Carmine Defiglio writes in his article in the Special Issue, it may be time to review our Strategy Petroleum Reserve (SPR) policies to adjust to current realities. But given that we have the SPR and agreements to share oil with other countries and dramatically falling oil import rates, energy security is fading as a rationale reason to ban exports. Allowing exports under the current circumstances could, in fact, preserve U.S. production rates and give U.S. producers continued incentive to keep innovating and lowering costs in a globalized marketplace.

One innovation that is possible and could lessen some of the objection to exports is new technologies to eliminate methane leakage from production processes. Several important oil companies are already proposing voluntarily to reduce emissions from production and technologies exist to limit leakage at U.S. drilling sites. The Obama administration is considering new federal standards for methane emissions. The politics of doing so with industry’s input could remove some of the partisan conflict between environmental and strategic U.S. energy goals.