American Politics Threatens Energy Future

American Politics Threatens Energy Future

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

It appears that America's energy security, and by extension its national security, will worsen in the short term. Blame it on the decades old political game of empty promises, both Democrat and Republican. Energy has become an unfortunate ideological slogan trumping its enormously important role in a society and economy such as the United States.

It's disappointing that in this juncture of sluggish economic growth and high oil prices President Barack Obama and his challenger Gov. Mitt Romney insist on promising panaceas to improve America's energy future.

Both candidates are focusing on energy independence, which makes for great sound bites but is foremost unattainable, and arguably not even in America's best interest. Obama is sticking to his green energy pitch and to cutting back on oil imports, while Romney is proposing regional energy independence.

The problem with both is that they don't address the biggest concern in term of energy security: prices. Cutting back on energy imports is great, but it doesn't address the damage caused by high energy prices to America's economy.

After all, how can America defend its global interests –whether it's Iran's nuclear program, a rising China, or a resurgent Russia- with its economy in shambles? Will reducing oil imports, while still paying between $100 and $130 a barrel, help reestablish U.S. economic might that for decades allowed it to exert its power diplomatically and militarily?

Number crunching

The most disappointing part of the empty energy pledges made by both candidates is that cutting oil imports does very little to address oil prices. U.S. oil production costs, thanks to regulations and environmental compliance, are some of the highest in the world. Neither candidate, especially Obama, want to address an environmentalist movement. The EIA is predicting a flat demand of liquids through 2020 as increased domestic production offsets decreasing imports.

That means the American economy will spend just about the same amount of money in liquid fuels through 2020, regardless who is elected or how successfully the candidates meet their promises, albeit more domestic production allows for more of that money to stay home and for more jobs to be created.

Still, neither of the candidates has come even remotely close to addressing rising oil prices as a result of an ever tightening global oil supply and demand balance and increasing geopolitical concerns undermining oil development plans throughout the world.

According to multiple private and government reports, every $10 increase in the price of a barrel of oil sustained over a year translates into a GDP contraction of 0.2 percent and around 120,000 less jobs. If sustained for two years, the exponential effect translates into a GDP contraction of 0.5 percent and around 410,000 less jobs.

Furthermore, the U.S. and global economic growth strains if it spends more than 9 percent of GDP on energy, a rare episode with two precedents, the first after the Iranian Revolution when global prices spiked and the second right before the global crisis of 2008 when prices reached nearly $150 a barrel.

After a lull, prices in 2012 are once again rising toward the 9 percent of GDP mark, illustrating just how dangerously the global economy is flirting with another downturn.

The fact that Obama is considering releasing oil from the country's strategic reserves illustrates just how concerned Washington is about rising oil prices, as well as just how hamstrung it is to address the issue.

But it's simply misleading to offer Americans energy policies that just address oil imports, and not a long term solution to rising oil prices that are seriously undermining the U.S. economy and security.

The failed pitches

If reelected, Obama is promising to extend and embolden current policies to cut down on oil imports and to promote alternative forms of energy. "If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone," Obama said in the Democratic convention.

But it's unrealistic that the U.S. can halve current imports of nearly 8 million barrels of oil per day (bopd) to lows not seen since 1986, so it's safe to assume that Obama's commitment referred to some other time frame, most likely 2008, before the first year of his administration began.

If that's the case, Obama is promising to cut imports to around 5.5 million bopd by 2020, which is still unlikely, although not impossible. In its 2012 Outlook through 2035 released in June, the EIA predicted net crude imports would plummet 4 million bopd by 2020 from 2008 to around 7 million bopd.

Furthermore, Obama had already committed himself to cut imports one third by 2020 from when he took over. The more bullish promise simply reflects the reality that he has already accomplished his goal. The U.S. already cut its oil imports by slightly less than one third.

The thing is, Obama can't take credit for this. The two main reasons for plummeting crude imports between 2008 and 2020, equivalent to around 2.5 million bopd) are almost entirely the result of increased domestic crude production (equivalent to a 1.7 million bopd) and from fuel production (equivalent to 0.5 million bopd). The remainder comes from other non-petroleum sources.

The credit for increased domestic crude production goes to the private industry operating in private lands after years of developing new technologies to extract tight oil from shale formations. And as for renewable fuels, it's true that government subsidies have spurred production, but it's not Obama's doing, and it's debatable whether there is even a net gain from biofuels, considering the cost of production.

As for Romney, his campaign promise is simply ludicrous. He pledged that by 2020 the U.S. would only import energy from Canada and Mexico. That means very little because it doesn't address oil prices whatsoever and very little in terms of net oil imports. It just suggests that it's safer to depend on two countries, rather than a myriad of them.

This goal is unachievable from just about every point of view. Canada will indeed increase export capacity by 2020, but most analysts expect any additional supplies will offset falling exports from Mexico. That means that the U.S. would have to increase current domestic liquids productions by at least an additional 3 million bopd. (Who is advising Romney on energy?)

Romney says this is achievable by opening up exploration acreage and transferring regulatory oversight to the states. This is highly debatable simply from a technical standpoint, but the biggest firewall is that it would require bipartisan support and a reassessment on environmentalism, a nonstarter.

Cala is roving correspondent and Economides is Editor-in-Chief of the Energy Tribune


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