Tuesday, December 13, 2011

America's New Energy Security

Thanks to new technology, the U.S. has become less dependent on petroleum imports from unstable countries.

By DANIEL YERGIN   WSJ.com 12/12/11

Every president since Richard Nixon has called for energy independence. Nevertheless, U.S. reliance on imported oil long seemed to be headed in only one direction—up—and that pointed to inevitably increasing dependence on the huge resources of the Middle East.

No longer. U.S. petroleum imports, on a net basis, reached their peak—60%—of domestic consumption in 2005. Since then, they have been going in the other direction. They are now down to 46%.

What's happening? Part of the answer is demand. U.S. oil consumption reached what might be called "peak demand" in 2005 and has since declined. The country has become more efficient in its use of petroleum, and that will continue as vehicle fuel economy goes up. The economic slump has also muffled demand.

But developments on the supply side are particularly striking. U.S. crude oil output has risen by 18% since 2008. Some of that has come from an increase in deep-water output, although after last year's Deepwater Horizon oil spill the pace of future growth is more uncertain. The big surprise is onshore, where the United States is experiencing an oil boom.

The reason is the sudden appearance of a new source, "tight oil," which is extracted from dense rocks. For years, tight oil has been a very marginal business. In 2000, it was only about 200,000 barrels per day, 3% of total output. Today it is about a million barrels per day. By the end of the decade, according to IHS Cambridge Energy Research Associates' estimate, it could reach three million barrels per day, over half of current domestic crude oil production.

The dramatic increase in tight oil has been made possible by the same technology combo, hydraulic fracturing and horizontal drilling, that created the "shale gale"—the explosive growth in natural gas production from shale rock.

The spread of fracking has generated debate about potential environmental impact, underscoring the need that these resources continue to be developed in a safe and transparent manner. It's vital that we do so, because shale gas now accounts for 34% of total U.S. natural gas output. Just a few years ago the expectation was that the U.S. would be importing large volumes of natural gas and becoming heavily dependent on world markets—and spending upward of $100 billion a year for those imports. Now people, including President Obama, talk about a hundred-year supply of domestic natural gas. Shale gas has also proved to be a job creator—over 600,000 jobs, according to the IHS Global Insight study released last week.

Oil extracted from shale also means lower imports, a lower bill for these imports, and substantial job creation. Thanks to tight oil, North Dakota is now America's fourth largest oil-producing state after Texas, Alaska and California. It may well move up to third or even second place.

North Dakota also has the lowest unemployment rate in the nation at 3.5%. The shale oil boom generates jobs in the oil fields, but it also has a long supply chain, fostering manufacturing jobs in states like Ohio and information technology jobs in California.

There are other changes in the world oil supply that can work in our favor. Many Americans have the impression that most U.S. oil imports come from the Persian Gulf region, or from hostile states. And it is true enough that Venezuela's Hugo Chávez, for instance, hardly hides his deep-seated enmity toward the U.S.

But the Persian Gulf represents 16% of our imports, and Venezuela 9%. By far the largest, and growing, source of imports is Canada, which supplies about 25%; Mexico is second, at 11%.

The main reason for Canada's large role is the expansion of output from its oil sands. Canada's oil sands now yield more output than Libya's total exports prior to its civil war. Current plans could double production to three million barrels per day by the beginning of the next decade. That would mean a higher share of our imports coming from our friendly neighbor and largest trading partner.

But how much more oil the U.S. imports from Canada will depend upon whether sufficient transportation exists. And in response to the State Department's postponement of the decision on the Keystone XL pipeline last month, the Canadian government has indicated that it cannot be wholly dependent on the vagaries of U.S. politics. The pipeline delay, said Prime Minister Stephen Harper, underscores "the necessity of making sure that we're able to access Asian markets for our energy products."

What he means is shipping some of the growing oil sands output west to the Pacific and on to Asia and particularly to China. Chinese companies, seeking to diversify their sources of supply, have already invested over $10 billion in Canada's oil sands.

It is true that the U.S. is still importing a larger share of its oil than it was in 1973, at the time of the first oil crisis. Even with increased domestic production and higher imports from Canada, it will still be part of the global oil market and vulnerable to disruptions and price spikes. Thus the U.S. needs to collaborate with other consuming and producing countries on energy security.

But the shift in oil sources means the global supply system will become more resilient, our energy supplies will become more secure, and the nation will have more flexibility in dealing with crises. It would also mean that economic benefits—in terms of jobs, manufacturing and services—would register on the ground in North America.

The most recent United Nations report on Iran's nuclear program, along with the call by French President Nicolas Sarkozy for an embargo on oil imports from Iran and possible sanctions on Iran's central bank, have raised the stakes. The Iranians have responded by again brandishing the threat to close the Strait of Hormuz, and by ransacking the British Embassy in Tehran.

Thus, over the next few years, new supply in North America becomes all the more important as a potential offset to rising tensions with Iran in the global oil balance. This gives new urgency to assuring that North America's oil resources are developed to what is now their much-greater potential.

Mr. Yergin is chairman of IHS Cambridge Energy Research Associates and author of "The Quest: Energy, Security, and the Remaking of the Modern World" (Penguin, 2011).

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