By Carl Pope, Bloomberg In recent years, US business and political leaders have giddily talked of a “Saudi America” gurgling with domestic oil and gas. It’s true that the US now has access to abundant supplies of cheap domestic gas capable of transforming the US economy. Too bad these same leaders are about to give away a vast chunk of North America’s hydrocarbon production – and all the strategic advantages that go with it. We’re already seeing the effects. On July 19, US drivers lost their price edge as West Texas Intermediate oil soared to $109 a barrel, almost equaling the cost of Brent crude in Europe, which only months before had sold at a $20 premium. What happened? Oil traders reversed two small pipelines so that instead of carrying US crude from Gulf Coast oil fields to the huge trading hub in Cushing, Okla., it was diverted to export docks, from which it traveled to Europe and Latin America. With that, traders set the stage for gasoline prices to rise to $4 a gallon or more. The exporting of oil and LNG is part of the biggest story hidden in plain sight: how the US is squandering the strategic advantages of cheap fuel and competitive manufacturing in favor of an energy-export policy that has no larger economic, political, environmental, or moral rationale. Competitive Edge How did this happen? Increased production of domestic oil and natural gas has largely been enabled by the newfound ability to fracture tight shale, a process that was not economically feasible in the past. Meanwhile, growing supplies of renewable energy, more efficient automobile and truck engines, and a new generation of Americans that is less enraptured by the automobile than previous ones are all helping to suppress demand. US oil production bottomed out at 5.5 MMb/d in 2011; it’s now up to 7.5 million and expected to reach 9 million by 2020. Natural gas production has soared to 67 Bcf/d from 50 billion a day in 2005. With consumption flat, the law of supply and demand is working. A few months ago, crude oil in the Midwest, where most production takes place, averaged $95 a barrel – $17 a barrel lower than the price set by the Organization of Petroleum Exporting Countries. The US price advantage on natural gas is even bigger. In Tokyo, OPEC LNG costs $16. Russian pipeline gas in the UK costs $10. In the US, the benchmark Henry Hub price is about $3.75 per million British thermal units – and has been as cheap as $2.20. The benefits of cheap gas flow throughout the economy. In the past three years, 95 major manufacturing capital investments, worth $90 billion in new spending, have been announced. Natural gas supplies 85% of the feedstock for the US chemical industry. Due to cheap energy, Alcoa Inc.’s alumina refinery in Port Comfort, Texas, went from being one of the company’s most marginal facilities, in danger of being closed, to one of the most competitive in the world. Expanding the export market for US natural gas will undermine this new competitive edge. If enough domestic supply can be sold overseas, prices in the US, observing the law of supply and demand, will rebound. Yet that same law doesn’t apply internationally; new US supplies of crude and natural gas on the global market don’t necessarily reduce global prices. Why? OPEC, led by Saudi Arabia, can manage supply to meet its price target. If supply grows too much, OPEC simply cuts production until the price rises. Keystone XL The combination of Canadian tar sands and light tight oil from the Bakken and Eagle Ford shale deposits in the US has created what the oil industry calls a “glut” in the US heartland. Enter the Keystone XL pipeline. Designed to rescue Canadian oil producers, the pipeline was marketed as a way to increase US access to tar sands oil. In fact, it’s a mechanism both to reduce that supply and raise its price by exporting it to foreign markets. The oil industry wants to import, refine, and export more Canadian bitumen. Yet at the same time, oil companies are shuttering refineries – four on the East Coast since 2010 – actions well suited to the creation of shortages and inflated prices. By linking US prices to the global market, the companies hope to free-ride on OPEC price-fixing without running afoul of US antitrust laws. The “Saudi America” myth helps sell these policies because it implies that the US is on the verge of ending its devastating reliance on oil imports – $346 billion worth in 2012 – and their attendant drain on the economy. That’s simply not true. The US currently consumes 19 MMb/d of oil, of which 9 million are imported. The Energy Information Administration projects that consumption in 2020 will be about 20 MMb/d, with US daily production peaking at 13 million before declining. So at the peak of US production, we will still be importing 7 MMb/d of oil. For the next decade, the annual import bill will remain about $300 billion. Given that enormous expense, why would the US want to export oil? Similarly, why should we encourage Canadian exports through our infrastructure? Canada, busily exploiting its tar sands oil, is eager to secure a transit route through the US to global markets, largely to avoid having to sell oil at lower prices in the US. You can’t blame Canada for wanting to reap OPEC prices. But why should the US facilitate that? The drive to export natural gas is similarly flawed. In approving four LNG export terminals, the US Department of Energy said that LNG exports were unlikely to raise domestic gas prices meaningfully. This finding rests on an assumption that the US has such vast reserves of shale gas that increased market demand will translate into greater production, not higher prices. Sweet Spots Is this true? The predominant view among gas geologists is that the US can increase long-term gas production significantly. For example, with a domestic supply estimated at 2,400 Tcf, it’s said that the US has a “hundred-year supply” of gas. However, some industry analysts contend that, while there is indeed plenty of gas in US shales, the amount that can be economically retrieved and produced at current prices is far smaller. Shale wells deplete rapidly, with up to 95% of production front-loaded into the first three years. There is also uncertainty about the degree to which deposits such as the Barnett Shale in Texas contain “sweet spots” – concentrated veins where production is relatively cheap surrounded by much larger areas where wells are less productive and profitable. The Energy Information Administration warns that its own projections of plentiful shale “are highly uncertain and will remain so until they are extensively tested with production wells.” So even without price pressure from exports, US natural gas prices by 2020 may well double from their present range of $3 to $4, simply because of increased costs of production at present demand levels. At $8, the US’s current competitive edge, which provides access to gas at one-third the price paid in Europe, almost vanishes. Exports would only make that situation worse. Purdue University researchers Wallace E. Tyner and Kemal Sarica calculated that LNG exports of 6 Bcf/d would increase domestic prices 16% by 2035 compared with a no-export policy. At 18 Bcf/d, the price would rise by 47%. With oil at $100 a barrel and natural gas at $3.50/MMcf, 1 BTU of gas energy costs about one-fifth as much as a BTU derived from oil. Argentina, Pakistan, Iran, and other nations fuel 15 million cars and trucks with natural gas. In the US, companies including Freightliner Trucks and AT&T Inc. are investing hundreds of millions in vehicles powered by natural gas – compressed natural gas for local fleets, LNG for long hauls – to reap annual fuel savings of up to $40,000 a vehicle. Hundreds of new natural gas fueling stations are being constructed along the interstate highway system. Absurd Policy Yet the move toward natural gas will be stopped in its tracks if US gas prices are tied to volatile global markets. Indeed, if the US exports its cheap, cleaner domestic gas, it will almost certainly have to import expensive, dirtier foreign oil to make up the difference. That’s a bad deal – and absurd public policy. By itself, the new LNG terminal in Freeport, Texas, may channel only 3% of US gas production into the export market, perhaps not enough to do serious damage. But there are now 19 other applicants for export terminals lined up behind Freeport, three already approved. If all were approved, they would have permission to export 39% of the US’s current gas production. They represent a huge threat to a new American Dream – one founded on a US economy freed from imported oil and powered by domestic gas. And the US government appears bizarrely inclined to accommodate that threat. Carl Pope is a former chairman of the Sierra Club.
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