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Musings: Is America Knocking On The Door Of Energy Independence?

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This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

A phrase introduced into the modern lexicon by President Richard Nixon in the early 1970s was "energy independence". Ever since then, as the nation's domestic oil production declined and our natural gas output stagnated resulting in ever-increasing imports of foreign oil and Canadian gas, national politicians campaigned on plans to make America energy independent. Nearly 40 years after President Nixon uttered the phrase, the shale revolution has transformed America's petroleum industry into an engine for hydrocarbon production growth. With that additional oil and gas production, America's dependence on petroleum imports has declined. Increasingly, not only are the politicians talking about energy independence, but energy industry executives along with energy economists and consultants are also openly talking about the day when the U.S. meets all its power needs from domestic resources.

In late September, the Energy Information Administration (EIA) released data showing weekly domestic crude oil production had reached the highest level since January 1997 – some 15 years ago. Reports are that despite the slowdown in drilling in the Bakken formation in North Dakota and Montana, production there should continue to rise during the second half of 2012. Two charts demonstrate the significance of the increase in domestic production. The first chart (Exhibit 8, next page) shows the weekly estimate of domestic crude oil production since January 1990 with a red line showing how the September 21 data compares with production in early January 1997.

Exhibit 8. Can We Get Production Back To 1990?

The second chart (Exhibit 9) shows the weekly domestic production and the weekly oil import figures. That latter weekly data series is susceptible to considerable fluctuation due to market conditions and weather impacts on tanker operations. What is obvious from this chart is the peak in oil imports and subsequent decline coinciding with the bottoming of weekly oil production and its subsequent increase.

Exhibit 9. Rising Production Lowers Imports

The decline in oil imports appears to be significant, but part of the explanation is that overall oil demand has dropped. That is shown by the chart in Exhibit 10. The chart shows total petroleum consumption and the weekly demand for gasoline. Gasoline demand shows slowing growth in 2007-2008 and then the beginning of a decline associated with the recession and changes in vehicle miles driven. The overall decline in petroleum consumption is largely explained by this decline in gasoline consumption. Due to this relationship, we know that to understand the future of the oil market in the United States, one must watch gasoline consumption and domestic oil production. Any change to their recent trend – either up or down – will impact the nation's goal of achieving energy independence.

Exhibit 10. Weak Demand Helps Lower Imports

The EIA's recent data showed that America has achieved 83 percent energy self-sufficiency. Again, the explanation for this high level is due to the combination of flat consumption, rising domestic production (oil, gas, coal and renewables) and declining imports of oil and LNG. Optimists expect domestic energy production to continue to grow, but that assumption depends on governmental energy policies and the nation's energy consumption, which in turn depends on the economy's growth.

Exhibit 11. Achieving Self-Sufficiency Is Complex

Yes, the nation is knocking on the door of energy independence, but some of the recent gains are the result of weak energy demand. Reaching a higher level of national energy self-sufficiency may actually signal that we are more a hostage to a weak economy with potentially significant social ills rather than having unlocked our true domestic energy potential. Reaching energy independence will likely remain an elusive goal for many years.

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

WHAT DO YOU THINK?

Post a Comment Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Rick MOrgan | Oct. 12, 2012
The energy puzzle is indeed very complex. Your noted slowdown in the Bakken might be attributed to the fact that the infrastructure necessary to produce/transport/refine the production is at its limit. I do think the US could make more efficient use of geothermal energy sources, but those are not as sexy as solar and wind, so the development monies from the government go elsewhere. Keep up the good work, as always, an interesting/provoking/knowledgeable read.

HA Reynolds | Oct. 12, 2012
Theres a couple of more explanations for at least part of the drop in rig count: (1) drilled holes in shale plays are bottle-necked behind frac operations, and/or (2) rig efficiency in shale plays has increased substantially (even as total production soars). http://www.aei-ideas.org/2012/10/u-s-natural-gas-production-continues-to-set-records-even-with-fewer-rigs-than-in-1998-thanks-to-advanced-shale-drilling/ I used to think that the break-even wellhead price for shale gas was about $4.50, but the price kept dropping as the gas rig count increased. This only started to make sense to me when I saw XO earlier this year publish that their fully absorbed lifting cost in the Eagle Ford was about $1/mmcf (!!!). My currrent guess is that the longer-term equilibrium price for nat gas at the wellhead is something on the order of $3-3.50 per thousand (2012 dollars; which of course means that the price will rise over time as the inevitable effects of QE1 through infinity start to hit).

Michael Davis | Oct. 12, 2012
Definitely never blow off our foreign sources of oil and definitely develop pipelines from our closest neighbors Canada and Mexico, definitely begin using more natural gas and derivatives in our automobiles domestically yet also allow export of natural gas via LNG terminals (they are currently being blocked by the Obama Administration that is seeking to keep natural gas prices low). That will serve two purposed of giving natural gas explorers the incentive they need to drill and also to increase US exports and help the trade deficit and ultimate reduce the nationa debt. Only by allowing natural gas to rise to an economic level, by keeping the government from imposing price restricting sanctions on natural gas exports, will natural gas drilling continue at a sustained rate and eventually lead US to energy independence.

Mario Messina | Oct. 11, 2012
All the energy we would ever need normally lies within 10 km where one stands, i.e., straight down, the heat of the earth. Geothermal energy, drilling for and prduction of will keep our industry asctive for a very long time. Mario Messina BS, MA, CEO of Messina Inc, WW. MessinaChemicals.com.

Glenn Parry | Oct. 10, 2012
My concern about all of this centers around your statement above, ".....despite the slowdown in drilling in the Bakken...". This slow down has occured not only in the Bakken, but in the Permian Basin and the Eagle Ford shale. There are 120 fewer rigs running nationwide now than there were at this time last year, this despite the fact that oil prices have remained at or above $90 during that time. I have heard 2 explanations for this slow down. Either operators have already spent their 2012 budget and will blast off again in 2013, or investors are finding out that these plays are not economic. We shouldnt blow off our foriegn sources until the votes are in.



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