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Charles Constantinou

Charles Constantinou

Mr. Constantinou is a graduate of the London School of Economics and Political Science. After 34 years of service with the United Nations (1961-1995), he…

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USA Energy Independence: Sense or Nonsense

USA Energy Independence: Sense or Nonsense

The USA became a net importer of oil after World War II due to the accelerated rate of economic growth based on low cost energy, especially oil. Nevertheless, the USA kept some of its oil producing capacity in reserve for emergencies through the regulation of production. This reserve was used repeatedly by the USA to supply oil to oil-importing countries in Western Europe and Japan and stabilize prices during the closure of the Suez Canal because of wars in the Middle East.

Henry Kissinger wrote, “…Until 1972 the United States had been in a position to control the world price of oil because it was producing well below full capacity. Thus America was, in effect, able to set the price by increasing or withholding production. As late as 1950 the country supplied almost all of its energy needs from its own production; in 1960 we were importing 16 percent of our own requirements while still having significant unused capacity; by 1970 we were approaching full production and importing 35 percent of what we consumed.

In early 1972 the Texas Railroad Commission, the organization that established ceilings on American production, felt compelled to make a fateful decision, although it went essentially unnoticed. With demand having risen to a point where it threatened an explosion of prices, the commission authorized full production. And that seemingly technical decision signaled the end of America’s ability to the world oil price.”

The following table shows USA oil consumption, production and net imports for the period 1945-2011

US Oil Production, Consumption, and Net Imports

Oil consumption in the USA climbed. Crude oil (including natural gas liquids), however, could not meet the increase in demand and, therefore, imports escalated. Of course, the oil situation has resulted in enormous foreign exchange costs that have climbed from $95.5 billion in 2000 to approximately $356 billion in 2011, which was equivalent to about 4.0% of gross domestic product or $1,145 per capita.

Hence the importance of USA energy independence which has been loudly proclaimed by every president since Mr. Nixon. However, energy independence should be defined properly to mean oil independence since the USA has always enjoyed coal independence and the recent shale gas revolution brought about by the application of the new technologies of hydraulic fracturing and horizontal drilling practically guarantees natural gas independence for many, many years to come. It has given hope through the rapid and very significant increase in shale oil production for the achievement of oil independence as well.

The US Energy Information Administration has estimated shale gas recoverable resources at 482 Trillion Cubic Feet and shale oil resources at 33.2 billion barrels in 2010. Already various projects have been announced for the export of natural gas especially to Asia and Europe through the construction of liquefied natural gas (LNG) facilities. Will the same happen with regard to oil? It all depends. According to the USEIA the USA will remain dependent on imports for about 43 percent of its oil consumption even through 2035. Other analysts, however, are much more optimistic. They base their optimism on the incredible rate of shale oil production increase in North Dakota where shale oil has jumped from 308,304 barrels per day in 2010 to 701,134 barrels per day in August 2012. Their optimism is also based on other shale oil formations in Ohio, Oklahoma, Texas and other states with resources in North Dakota alone estimated at 200-400 billion barrels and recovery factor of 25 percent rather than the traditional 10 percent.

In view of the above estimates, USA oil independence appears to be based on a lot of sense and, of course, hope. But discussion should refer only to the USA and not talk nonsense of North America as repeatedly mentioned by one of the candidates for the US presidency for the next four years. North America, of course, includes Canada and Mexico, which are already exporters of oil. Such talk shows little respect for the intelligence of ordinary Americans and, of course, the specialists who know better than that.

By. Charles Constantinou




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