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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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True Energy Independence Won’t Come From Oil

American energy independence was a hot topic towards the tail-end of 2019 before the global coronavirus pandemic, but the oil price war threw a monkey wrench in the works.

Depending on whom you ask, the United States is on the cusp of becoming--or has already become--a net oil exporter. It's an energy utopia that practically all modern presidencies, from Nixon during the oil crisis of the 1970s and Bush during his famous state of the union address in February 2006, to Obama and, more recently, Trump have frequently extolled. 

Even for those of us who have little interest in the political demagoguery and ivory tower jousting that is rampant among political circles, there's a broad agreement that America should reduce its dependence on imported oil.

Of course, the country has been able to achieve its net exporter status, thanks to the second shale boom, which more than doubled U.S. crude output in less than a decade. But is America any closer to true energy independence than during Nixon's time, or is this just another populist charade masquerading as an energy strategy?

Net Oil Exporter

For many years, the United States has been the leader in the $6 trillion global energy market and is currently the world's largest oil producer accounting for about 18% of global oil supply. But it has also been a leading importer of energy with foreign markets supplying about 20% of its needs.

However, in 2019, the U.S. became a net petroleum exporting nation for the first time in 75 years with the latest data by U.S. Department of Energy (as of November 2019) showing that the country exported around 750,000 b/d more than it imported--the third consecutive month it did so.

Unfortunately, this net exporter tag comes with an asterisk: U.S. crude oil imports, specifically, averaged 5.8 million b/d in November vs. 3.0 million b/d for exports, with the U.S. Gulf Coast being the only region that exported more crude oil than it imported.

Indeed, U.S. crude imports have remained stubbornly high even during the shale boom thanks in part to healthy domestic demand. U.S. crude oil production has shot up 160% to over 13 million b/d since the advent of the shale era; meanwhile, domestic demand has remained flat, but very high at 19-21 million b/d.

In 2019, the country still imported 9.1 million b/d of petroleum and other liquids, with 6.8 million b/d of those being crude oil, due to constraints such as regional supply/demand imbalances, infrastructural challenges, and other factors. Further, many of the refineries in the United States are optimized to process the heavier crude grades from Canada, Venezuela, and Mexico instead of the lighter, sweeter oil crude from its own shale fields. 

Source: EIA

The main consolation here is that a bigger proportion of its oil imports have been coming from its northern ally with crude imports from Canada clocking in at 134 million barrels in 2019 from 76 million in 2008. As Bush predicted, the United States is no longer as heavily reliant on OPEC for its oil, with the cartel supplying less than 30 percent of imports.

The Myth of Energy Independence

True energy independence, however, goes beyond the mere supply-demand equation.

True energy independence means that the United States should not only supply all of its oil needs but also that its oil markets should be immune to disruptions by events in foreign markets. In other words, the Department of Defense and the American consumer should no longer be beholden to OPEC+ and global energy price swings.

The reality here, however, is very different. The sad truth frequently hits home when major supply/demand shocks occur, such as the Saudi drone attacks as well as the epic oil price crash due to price wars and COVID-19.

Although one could certainly argue that the shale boom has watered down OPEC's influence, offering a level of insulation against price shocks when OPEC restricts output, the United States has hardly separated itself from the world's energy stage.

Oil prices spiked 20% in the aftermath of the attacks and remained 10% higher for weeks despite Saudi Arabia having enough reserves to last several weeks and quickly restoring production. As the Times noted, had this attack happened a decade ago, prior to the rise of U.S. shale, oil prices would have spiked way higher and rocked the global economy. Still, it was a stark reminder that energy sources like oil, coal, and natural gas cannot hide from global fluctuations. 

The oil price war + COVID-19 has been much more destructive primarily because they are happening on a global scale and have severely crushed demand.

Part of the problem here is fungibility. Whereas there are no shortages of barriers to free trade across the globe ranging from tariffs and legal sanctions to the more practical problems of price and infrastructure, consumers of fossil fuels are generally able to access them from producers from all over the globe. The U.S. produces 18% of the world's oil, and as such, it has some clout to sway global markets, but it is only one in many of the other moving parts that affect the remaining 82% of the world's oil supply.

Then, of course, there's the question of why the United States still has to import so much oil. 

You can pin much of the blame on an antiquated marine law, the Merchant Marine Act of 1920, colloquially known as the Jones Act or simply J.A., which demands that vessels undertaking shipments between two U.S. ports be U.S.-built, U.S.- owned and U.S.-manned, as we explained here.

Meanwhile, refineries at the epicenter of the shale boom are located in the Midwest and the Gulf Coast, where many have upgraded to handle heavy oil from Canada, Venezuela, and Mexico. This leaves refineries on the U.S. east coast as the most obvious destination for light fracked oil. 

Unfortunately, it costs ~3x to ship oil from Texas to refineries on the U.S. East Coast compared to shipping it further to refineries in Canada, thanks to the Jones Act. There are simply not enough JA-compliant ships to transport oil from Texas to the U.S. East Coast, meaning it must be shipped abroad. Similarly, it costs more than 3x for northeastern U.S. refineries to ship oil from Texas compared to shipping from West Africa or Saudi Arabia.

The Panacea: Going Green

Ultimately, true energy independence is an illusion in the era of globalization because the hyper-connectedness of the market makes it impossible.

The only way to be truly independent of these risks is not by pumping more oil but by not using these energy sources at all--by going green.

A good place to start would be to ramp up the electrification drive.

According to the EIA, petroleum is the largest primary source of energy consumed in the U.S., accounting for 36% of total energy consumption in 2018. More than two-thirds of finished petroleum products consumed in the U.S. are used in the transportation sector.

Source: EIA

But simply telling people to ditch their ICE vehicles and buy EVs won't do much to wean the nation off overreliance on fossil fuels because current EVs largely charge from the grid, meaning they more or less still rely on fossil fuels as their source of energy depending on a country's or region's energy mix. EV manufacturers will need a rapid ramp-up of solar-powered chargers such as Tesla's third-generation supercharger, unveiled in March 2019.

Making the switch to renewables is, of course, the ultimate goal.

Renewable energy sources such as solar have their limitations, too, since they require special elements and metals such as gallium, indium, tellurium, neodymium, europium, yttrium, terbium and dysprosium that frequently have to be imported or mined domestically at great environmental costs. But unlike fossil fuels, these elements are not the energy source itself but rather part of the tech that makes them possible and can therefore be substituted and replaced through innovation.

In the final analysis, all this talk of "energy independence" and "energy dominance" is about becoming the masters of our own fate. This is something that we clearly cannot achieve when still relying on fossil fuels for the bulk of our energy, and going entirely green is the closest we will ever get to true energy independence.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Jan on April 16 2020 said:
    So the author started out well explaining the net exporter concept and we technically aren’t there yet. We talk about imported energy sources and it’s natural to bring up EVs as he did.

    But why switch to carbon footprint out of the sudden? Yes, even if my EV is burning 100% coal (it’s not) it is a 100% domestic energy source that we have a huge excess of and rightfully replacing imported oil. Wasn’t that the original premise and title of the article?

    Also, electricity powering transportation is at least twice as efficient (minimal loss to heat) and always getting cleaner.
  • Lee James on April 16 2020 said:
    It sure looked like we were becoming energy independent during the second wave of shale oil. Everyone's attention was on the size of the flow and not on production cost, pollution cost and actual profitability.

    Meanwhile, as the author suggests, we are not insulated from the rest of the world. It will take home-grown clean energy to do that. We need to re-double our efforts and have a sensible national energy plan; not a national whim.

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