Categories: Energy issues / Policy / Political spin
17 November 2012
Energy independence: a misguided pipedream
[This essay by James Woudhuysen and Paul Seaman first appeared on spiked-online.] Barack Obama’s victory in the US presidential election looks unlikely to subdue the growing calls, throughout America, for national self-sufficiency in energy. Both candidates tried to sow illusions in what Obama dubbed ‘energy security’ and his opponent Mitt Romney called ‘energy independence’. However, these goals are neither desirable nor, in today’s integrated world economy, possible.
There were significant differences between Obama and Romney on energy policy. Although both said they support all forms of energy, Obama emphasised alternative sources such as wind and solar, while Romney wanted to up the extraction of coal and oil. The two candidates also argued about the regulation of fossil fuels. Obama boasted that, since the 2010 BP Deepwater Horizon oil spill in the Gulf of Mexico, his administration ‘has launched the most aggressive and comprehensive reforms to offshore oil and gas regulation and oversight in US history’; around coal, oil, conventional natural gas and the hydraulic fracturing (‘fracking’) of shale gas, Obama is out to guard against methane emissions, to maintain worker safety and to protect the natural environment. Romney, by contrast, argued that Obama has, through regulation, ‘intentionally sought to shut down oil, gas, and coal production in pursuit of his own alternative-energy agenda’.
Differences also emerged over the proposed Keystone XL oil pipeline pumping heavy crude from the controversial oil sands of Alberta, Canada, down to the US Gulf Coast. In January, Obama refused to issue a permit for the cross-border section of Keystone – a decision that is likely to be confirmed now that he has been re-elected. On the other side, Romney’s running mate, Paul Ryan, promised in October that Romney would approve Keystone on his first day in office.
But, for all their differences, Obama and Romney were agreed on the ultimate goal of energy policy: ridding America of dependence on foreign oil and other fossil fuels. Across the spectrum of political views in the US, the aim of energy self-sufficiency goes widely unquestioned.
In his January 2012 State of the Union address, Obama hoped for a future ‘where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world’. He proclaimed that the US needed ‘an all-out, all-of-the-above strategy that develops every available source of American energy’. Obama opened his re-election bid saying his message was simple: ‘It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America.’
The current debate suggests that US energy exports should be banned outright. Every joule of energy made in America, the feeling is, should stay in America. To American patriots, perhaps troubled by wars in Iraq and Afghanistan and worried about another war over Iran, this stuff sounds appealing. But is it really right that the US energy industry tries to rid America of imported oil and of foreign-policy belligerence? And are these things even possible?
Autarchy in energy supply is a chimera. It is no more desirable, and no more realistic, than past and present calls to limit globalisation and ‘build and buy American’ instead. To steer technological innovation in energy toward indigenous supply is a mistake – for America, and for every other nation, too.
The latest edition of Petroleum Economist easily despatches all such ambitions, quite reasonably arguing that going it alone in energy is either naïve or deliberately misleading. The magazine mocks Romney’s silly isolationism and destroys his claim that more oil drilling, drilling permits and drilling licenses would lower the price of oil for Americans. It points out that offshore projects, for example, take at least 10 years to come on stream – two years longer than Romney could possibly have served as a two-term president.
The discussion about self-sufficiency reveals an attempt by politicians to get energy to serve much wider purposes. One of the remarkable features of the second of their three televised election debates was that, whenever issues of jobs, the economy or China came up, Obama took refuge in rhetoric about US energy security, and Romney ran scared toward pronouncements on energy independence.
These evasions are not just ridiculous. They reveal a posturing ‘resource nationalism’ that is more familiar coming from a Middle Eastern despot such as Libya’s Muammar Gaddafi or a puffed-up prat such as Venezuela’s Hugo Chavez. As Obama’s own, belated ‘pivot to Asia’ in November 2011 attests, no country – even America – is an island. For years, the world’s oil and gas have been piped across thousands of miles, on land and sea. Deposits of ‘unconventional’ fossil fuels such as shale oil and shale gas are being unearthed from Argentina to Poland. Tanker drivers and captains carry passports; power lines cross borders; and undersea cables connect nation to nation. The lithium in electric-car batteries is to be found in Chile, China and Australia. Just like uranium, the world’s almost limitless supplies of wind, solar, tidal and geothermal power are an international phenomenon. Even the ITER nuclear fusion project unites the efforts of engineers and physicists from China, India, Japan, South Korea, the US, Russia and Western Europe.
Like nearly everything else, the production of energy benefits from a division of labour, and that division of labour is international. The task facing America, then, is not to subordinate the economy to growing energy at home, or to hope that the middle class will prosper through homegrown energy. It is to revive general economic growth and ensure that energy – based on international supply, production and innovation – fully lubricates the wheels of wealth creation. Yet in the US elections, the bunker mentality simply got worse.
Even free-traders are protectionists now
America’s energy sector is actually not very comfortable with the constraints of autarchy. Since the March 2011 Fukushima nuclear accident, Japan’s demand for gas has tightened global gas markets. As a result, US gas companies such as the giant ExxonMobil, finding that shale gas has lowered prices at home, may now build terminals from which to export liquefied natural gas (LNG) to Japan and elsewhere; indeed, in a striking example of globalisation, Sempra Energy plans to build a $5 billion LNG export facility in Louisiana – with help from Japanese and French business. In the space of about 10 years, then, America has gone from plans to import LNG to plans to send it abroad.
In Washington, however, the policy wonks at the prestigious Brookings Institution – a liberal, Democratic Party think tank – are in two minds about this development. Brookings is against the capping of US exports of LNG: caps, it says, would ‘encourage a tighter [world] market for natural gas, some of which goes to produce products that American consumers import’. Yet as its worry about importing gas-based inflation confirms, Brookings is also infected by protectionism. Thus, it enthuses: ‘With the liberalisation of Mexico’s oil sector, the hemisphere [North and South America] could come close to being oil independent over the next decade. The next president must not let any of these opportunities slip away.’
Now, America is certainly blessed with unusually large deposits of natural gas and oil – of both conventional and unconventional types. America has also brought fracking and long-reach horizontal drilling not just to shale gas, but to shale oil, too. Between 2006 and 2012, rigs for shale oil have risen from 300 to 1,400. With these kinds of developments to boost domestic supplies, it has proved easy for someone like the delightfully named Ryan Lance, chief executive of ConocoPhillips, to proclaim in June 2011 that North America could become self-sufficient in both gas and oil by 2025. But regardless of America’s undoubted reserves, it cannot cut itself off from the global market for oil. As the US Congressional Budget Office observed the month before Lance spoke, were America to increase oil production in a drive to cheapen the cost of its transport fuel, other major oil-producing countries would simply reduce their actual or planned production of oil in return, ‘thereby diminishing or eliminating the effect of such US actions on the world price of oil’.
Once again, we encounter the interconnectedness of world energy production, distribution and pricing. And that interconnectedness is not a problem: it is something to celebrate. One of the best things about oil is that the whole world’s best experts engage in the supply of equipment for it, and in extraction, equipment supply, refining and transport. It simply does not make sense to downsize the industry to the confines of national and regional boundaries so as to create multiple prices for a commodity that is made, consumed and priced globally.
Defects of regional autarchy: the example of gas
In fact, the real challenge is not to turn the clock back on the globalisation of oil, but to accelerate the globalisation of gas. Today’s gas market suffers from the paradox of having both increasing sources of supply and wildly differing levels of availability and pricing. There are at least five separate regional zones trading in gas, bringing about relatively low prices in the US and high ones in Japan and Europe.
This fragmentation represents an opportunity for some. Qatar, which has few local customers to satisfy, has been constructing vast production hubs and docking facilities for LNG, as well as gigantic supertankers designed specifically to carry large quantities of the stuff over vast distances. It was to Qatar that Japan, the largest importer of LNG, turned when all its nuclear reactors went offline after Fukushima. The globalisation of energy is what has kept the lights on in Japan.
But for LNG to become a truly mass-market commodity with a global benchmark price, it would have to come from multiple sources, including West Africa, Russia, South and North America. That would require a global network of hubs on the world’s coastlines – hubs for the conversion of natural gas to liquid at casting-off points, and for conversion back to gas at destinations. Some hubs are in place. But as America’s fondness for the idea of autarchy reveals, investing in LNG export or import hubs – already a business made volatile by the anarchy of capitalist markets – is made more risky still by the irrational caprice of government policy.
As if that were not enough, other players have been exploiting the lack of a global gas market to shore up their grip on a particular region. Russia’s Gazprom, for example, which supplies one quarter of Europe’s gas, aims to become a vertical supplier; in other words, the region’s major producer, transporter and distributor of gas to industry and consumers. Gazprom doesn’t face much competition. More than 80 per cent of the EU’s gas consumption comes from just three countries – Norway, Russia and Algeria – and Russia alone supplies 40 per cent of the EU’s imported gas. The state-owned gas companies from these three countries – particularly Gazprom – also own most of Europe’s gas pipelines.
Plans by various consortia to break Russia’s grip on Europe’s gas supplies have faced many hurdles. An example of this is the Nabucco pipeline. Avoiding Russia and its allies and costing €14 billion, Nabucco should, with luck, stretch 3,900 kilometres to reach Europe with gas supplies from Azerbaijan, buttressed with additional stocks from Uzbekistan, Turkmenistan, Iraq, Egypt and Iran. It has been much delayed, but is by no means dead.
By contrast, as an example of what has already been achieved, take a look at China. It has almost completed an 8,700 kilometre natural-gas pipeline linking Turkmenistan to Shanghai in the east and Guangzhou and Hong Kong in the south. Three out of eight branches of this network are operational: currently, they meet the needs of 100 million Chinese.
The world economy needs more such intercontinental gas pipelines. One step forward would be a 4,000 kilometre trans-Saharan gas pipeline from Nigeria to Europe. If a wider international grid of gas pipeline grids is one day linked up both to more plants for the liquefaction of natural gas and to more ships to carry the product to wherever there is a demand, then a global gas market would become more of a reality.
Nuclear, wind and solar power also only make sense if the technology is globalised. That’s not least from the point of view of commonalities such as price, parts, operating performance, maintenance and safety. It is the existence of the global markets in oil and coal that keeps their price and sources of supply relatively competitive and universal (though lack of research and development and innovation limits this benefit).
Autarchy doesn’t make sense in energy, not even for electricity generation and transmission. That’s why Europe’s electricity grids and sources of supply increasingly interconnect: it’s the most efficient way of regulating supply and demand.
The London manifesto for innovation, Big Potatoes, coined the slogan ‘Think global, act global’. The reality in energy supply today, regardless of all the hopes in the US about getting closer to making all the oil and gas it uses, is that both companies and governments are forced to act globally, rather than merely regionally or domestically. Nevertheless, American illusions in autarchy and ‘local is best’ are probably greater than ever.
Energy efficiency interpreted as a means toward energy autarchy
Since December 2007, when President George W Bush signed the Energy Independence and Security Act, official discussion in the US has moved from worries about America’s vulnerability around foreign supplies of oil to a renewal of the country’s historic hopes in oil independence and the creation of new hopes in gas.
In the same year as the Act went through Congress, America’s National Petroleum Council (NPC) sent a pessimistic report, Facing the Hard Truths About Energy, to then energy secretary Samuel Bodman. It stated: ‘The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically…. [However] “Energy Independence” should not be confused with strengthening energy security. The concept of energy independence is not realistic in the foreseeable future, whereas US energy security can be enhanced by moderating demand, expanding and diversifying domestic energy supplies, and strengthening global energy trade and investment. There can be no US energy security without global energy security.’
Since 2007, however, the NPC has changed its tune. In September 2011, in a report sent to US energy secretary Stephen Chu and significantly titled Prudent Development: Realising the Potential of North America’s Abundant Oil and Gas Resources, the NPC invoked and formally agreed with its 2007 critique of energy independence, but went on to insist that ‘a strong portfolio of US and Canadian oil development options exists to cover current and near-term production and long-term development prospects. If these options are exploited, there are grounds for optimism that North America can continue to be a major crude-oil producer to 2050 and beyond, meeting a significant proportion of its market needs. In a reasonably unconstrained case, the United States and Canada could produce up to 15-18million barrels per day by 2035, potentially a much higher proportion of regional demand than today.’
The figure quoted is indeed ‘a much higher proportion’ of North American demand. However, to deliver the NPC’s figures will be a stretch. The US Energy Information Administration says that, in 2013, America will demand 18.88 mbd of liquid fuel. At present, though, production is little more than half that: as Petroleum Economist points out of America in 2011, indigenous oil output, at 10.1million barrels per day, ‘was still 8.7 mbd shy of self-sufficiency’ – an enormous shortfall, and one that came ‘despite… [a] much-vaunted surge in domestic production’.
Naturally, the NPC didn’t mention the word autarchy. However, US hopes in oil independence go back a long way. The reason is simple: America puts a massive premium on its ability to control the supply of fuel for three of its key institutions – the car, the truck and the jet aircraft.
Excited by the possibility of autarchy in petrol and diesel, the New York Times describes America’s new – and old – hopes in oil independence like this: ‘Americans are pumping significantly less gasoline. While that is partly a result of the recession and higher gasoline prices, people are also driving fewer miles and replacing older cars with more fuel-efficient vehicles at a greater clip, federal data show…. Taken together, the increasing production and declining consumption have unexpectedly brought the United States markedly closer to a goal that has tantalised presidents since Richard Nixon: independence from foreign energy sources, a milestone that could reconfigure American foreign policy, the economy and more. In 2011, the country imported just 45 per cent of the liquid fuels it used, down from a record high of 60 per cent in 2005.’
In America’s media commentary on energy, it is often remarked that US hopes in oil independence go back to President Nixon. In fact, however, they go as far back as 1960. That long tradition explains why the Arab oil embargo of 1973 made dreams of autarchy so appealing to policymakers. So today, when oil prices are quite buoyant, the NPC is all too ready to toy with energy independence: ‘US and Canadian oil production, despite its high levels, currently falls well short of satisfying demand in the region. The North American oil supply potential discussed here does not indicate US and Canadian oil production could grow sufficiently to bridge this gap, unless there are also significant declines in demand for oil.’
Now, how are such declines in oil demand supposed to come about?
A significant passage of the Energy Independence and Security Act was devoted to green jobs. But it was not just the energy efficiency of buildings that the 2007 Act saw as lowering US vulnerability to external energy supply, for the Act also covered the efficiency of vehicles, appliances, lighting and industrial processes. And to major blocks of text on these issues, it added further ones on biofuels, renewable energy generally, and plug-in hybrid cars. Have initiatives like these dropped off as US oil production has increased? No. In subconscious style, efficiency, renewables, biofuels and electric cars are all now held as means toward US energy autarchy. That is why the NPC has announced that ‘Energy efficiency deserves continued and increased efforts’. And that is why Obama put such a stress on energy efficiency in the election campaign – it is one of the issues, along with his fondness for renewable sources of energy, that separates his kind of autarchy (‘energy security’) from that of Romney (‘energy independence’).
In America, the shifting interpretation of what energy efficiency amounts to brings out the backward consequences of autarchic prejudice. Energy efficiency was once a means of saving money, then a means of combating climate change, then a means of slowing resource depletion. Nowadays, though, it is interpreted within the utopian and reactionary framework of US autarchy. But the result of such a policy is, paradoxically, not to increase US innovation in oil and gas technology, but to diminish it. Given all the emphasis energy efficiency gets, American energy research and development is all too easily distorted away from energy supply.
Conclusion: pipelines, not pipedreams!
Obama’s and Romney’s trumpeting of energy-autarchy and energy-efficiency prejudices during the election campaign reveals how they lack both the policies and the will to build a better future. Meanwhile, the longer politicians are allowed to get away with selling their energy pipedreams, the greater the degree of damage they will do. Already New York’s mayor, Michael Bloomberg, has tried to shrug off responsibility for keeping the city supplied with power and gasoline, blaming shortages after Hurricane Sandy on global warming, rather than his own paralysis. And the energy self-sufficiency theme has just this Monday been given succour by the publication of the International Energy Agency’s World Energy Outlook 2012, which predicted that the US may become the world’s largest oil producer within the next decade.
The world needs vast quantities of energy, produced more cheaply than today, using capital-intensive methods and machine production. And all that needs doing on a global, not a national scale.
James Woudhuysen is professor of forecasting and innovation at De Montfort University, Leicester, and co-author of Energise: a future for energy innovation.
Paul Seaman is a communications professional based in Zurich, with specialist interests in energy and crisis management.
(1) Richard Sarsfield-Hall, Principal from Pöyry Management Consulting, ‘Shale Gas and Shale Oil: Insights on The Unconventional Twins’, Future Energy Strategies seminar on ‘shale oil; brave new hydrocarbon frontier? ’, London, 16 October 2012