THE BLOG
01/30/2015 12:00 pm ET Updated Apr 01, 2015

Death of a Shalesman: U.S. Energy Independence Is a Fairy Tale

David McNew via Getty Images

There is nothing "splendid" about isolation. Far from being an advisable policy in today's interconnected world, it is a fear-based mantra that may have disastrous effects on America's place in the globe -- and on her commercial relationships.

With its origins in a strategy devised by the Disraeli government to keep 19th century Britain quarantined from the murky affairs of the European continent, the foreign policy doctrine of "splendid isolation" was aptly applied to America prior to its involvement in the First and Second World Wars. The U.S. was mighty enough to stand on its own both economically and politically, and therefore could refrain from engaging in quagmires in Europe or in conflict-riddled messes stirred up by rascals elsewhere in the world.

Fast-forward to the present moment, and America's shale bounty -- its surge in domestic supply of oil and gas produced via hydraulic fracturing, or fracking -- has once again given rise to discussions of "splendid isolation." Many policymakers view America as an "energy island." Emboldened by an abundance of shale gas and oil, the U.S. can blissfully afford to stand alone -- or, at the very least, it has the luxury of being delightfully selective about the countries with which it engages on the international stage. And while the American economy is blitzing the rest of the world, what could be better than to stand on a pedestal?

Ever since the early 1970s, when the production of conventional oil and gas peaked in the U.S., and the O.P.E.C. oil embargo of 1973 brought the country to its knees, every American president has sought to proclaim "energy independence." And for the fourth year running, President Obama succumbed to the temptation. As the President proclaimed in his State of the Union Address, "We are as free from the grip of foreign oil as we have been in almost 30 years." Yes, imports are down, and U.S. crude production is up. Yes, consumers are reaping the benefit of lower gas prices. But we're still relying on foreign oil to meet our resource needs.

And America's frackers are up shale creek without a paddle. As the recent corporate bloodletting in North Dakota and Texas clearly illustrates, shale gas and oil are relatively expensive to produce, and operations are often commercially unviable in a low-price environment. These high-cost resources stand in market contrast to some of the low-cost conventional hydrocarbons that we continue import. What happens when U.S. shale producers fail to raise capital to finance their drilling programs beyond 2015? What then for U.S. energy independence?

Just as Europe has discovered that its foray into renewable energy is painfully unaffordable in a low-growth economy, so the U.S. may learn that relying on shale resources is simply unsustainable. Banking on high-cost oil and gas from fracking to provide that much-vaunted enigma of energy security is a policy that is completely divorced from reality. It is a fairy tale. And for foreign countries seeking to exploit their own unconventional resources -- such as China and Argentina, the lessons of America's costly and cold shale death-bed should apply. It is low-cost resources -- rather than expensive science experiments -- that are necessary to fuel and sustain economic growth.

The World Bank just trimmed its forecast for global growth, claiming that the world could not rely on a "single engine" of a strong U.S. economy. And as I.M.F. Director Christine Lagarde recently highlighted, the plunge in oil prices may not provide the global economy with the boom that many economists projected. On the contrary, the I.M.F. shaved 0.3 percentage points off of forecasts for global growth for 2015 and 2016. With high levels of international debt, unemployment and trepidation about the markets, there is no guarantee that consumers will go out and spend the windfall saved from lower petrol prices, thus giving a boost to the global economy.

Moreover, according to Ricardo Hausman at Harvard's Kennedy School, "We may see financial disruptions triggered by over-leveraged oil-exporting countries and corporations that could then spread in unanticipated ways." Majority state-owned oil companies such as Petrobras are heavily levered in dollar-denominated debt: as the dollar strengthens, they may be unable to service their debt. And if some of these players collapse, the ripple effect could be catastrophic.

Amidst such a grim economic outlook, the world needs low-cost resources. This should be a question of our generation, and a primary focus of our attention. Where will we find the cheap resources necessary to fuel and sustain our economic growth?

Unfortunately for the environmentalists, the answer is not renewable energy. The U.S. government-backed Energy Information Administration (EIA) "estimates that about 11 percent of world marketed energy consumption is from renewable energy sources (biofuels, biomass, geothermal, hydropower, solar and wind). According to B.P., renewables (including hydroelectric) accounted for about 9 percent of worldwide energy consumption in 2013. Even by 2040 -- that is, a quarter of a century from today, renewables are forecasted to make up only 15 percent of global energy consumption. With all of the buzz about green energy, why such low numbers?

PRICE VS. COST
It is helpful to take a step back and ask two relevant questions. First, how much does a unit of energy cost? And second, what is a unit of energy used for? As obsessed as we are with world energy prices, we seldom give pause to ask responsible questions about how much different energy sources cost to produce.

We may look at the world and see an abundance of sunlight, water and wind -- as well as rapid advancements in technology to harness these natural elements into energy. But storing it and transporting are another matter. With solar, power and wind -- in contrast to the fossil fuels of oil, gas and dirty coal -- the costs of production, storage and transport remain prohibitively expensive. It is partly for this reason that the I.E.A. (the energy research agency backed by wealthy countries and headquartered in Paris) warns that "annual growth in new renewable power is seen slowing and stabilizing after 2014, putting renewables at risk of falling short of the absolute generation levels needed to meet global climate change objectives." If a unit of energy is substantially more expensive to develop and to use -- in contrast to coal, oil or gas -- then a politician tasked with growing the economy or making consumers (read: voters) happy, may well opt for a low-cost option.

It is also helpful to ask what energy is used for. Renewable energy is increasingly used for global power generation, with high-fangled solar panels lighting up posh Georgian houses in Notting Hill and powering ports and mosques in a small village in Tanzania. Considerable advances have been made in sunlight-rich and fossil fuel-starved countries such as Morocco, Jordan, Egypt and Tunisia, where the I.M.F., the I.F.C. (the private sector arm of the World Bank) and the E.B.R.D. are providing funding and support for both photo voltaic (P.V.) and concentrated solar power (C.S.P.) plants. These are vital advancements for electricity generation in a part of the world where demand is set to grow at a steady rate. It is for this reason that the I.E.A. is keen to point out that renewables made up 22 percent of power generation in 2013 and forecasts an increase to 26 percent by 2020: a bigger slice of power generation but a small dent in the worldwide energy mix.

Eerily, the research agencies' bullish figures on renewables echo the hype about light tight oil in the U.S. While America may be producing more oil than it has in decades, it still needs to import heavy crude oil to meet its needs. Likewise, while there is a clear trend in the increase of the use of renewable energy for power generation, there is no indication that renewable energy will replace fossil fuels for transport on a global scale. Even the green-eyed I.E.A. estimates that biofuels accounted for only three percent of worldwide transport fuel in 2013.

The problem is that we see the figures we want to see, and discard the rest. We in the West ardently want to believe that energy security can be obtained through shale resources -- or even better, through a sudden increase in green energy. And with our abiding belief in technology, we think advances in shiny new tools will solve all of our resource problems. So when we identify a trend in shale production or in renewable energy and we find data that seems to match that trend, we tend to view the future as a straight-line extrapolation of the status quo.

And unfortunately for the outlook on renewables, when it comes to transporting the world's 7 billion people, and all its goods and services, oil is still king.

Crude oil is a fungible commodity that is cheap to move, easy to store and yields the most bang for its buck in fueling cars, lorries and airplanes. Despite projections of slower growth in China, burgeoning middle classes in both India and China herald an increase in vehicle density over the long term. And these cars are unlikely to be Teslas. As Elon Musk's recent commercial upsets in China attest, simple, diesel-powered cars are the preferred upgrades from pedestrian and motorbike activity. Electric cars are unlikely to make a big debut in emerging markets near you. But a misperception remains in developed countries that the world will suddenly turn green and move "beyond petroleum." Part of the disconnect lies in the fact that most people that write about energy are likely to have ridden in a Tesla, while most people who actually consume the world's energy may never even see one.

Cheaper and cleaner than oil -- and seemingly abundant in supply -- shale gas was intended to be our "bridge" fuel to a bright future of renewable energy. But a clear look at the costs involved reveals that shale is a teetering bridge leading to an even higher-cost future. It is unsurprising therefore that policymakers from Dubai to the Dakotas maintain their sights on coal as a cheaper source of power generation.

LOOK ON THE BRIGHT SIDE
So where does the fate of our energy future lie? The answer is that which most folks in Washington and Brussels don't want to hear: the Middle East. Russia. Central Asia. This is not a cause for despair. It is an honest appraisal of the geopolitical reality we face today. In the West, the bulk of our energy should therefore focus on: how do we sustainably engage with these countries to maintain an assured supply of oil and gas to fuel our economies? Given that resources are one of the ties that bind us, how do we successfully manage our relationships with peoples in faraway lands, replete with cheap oil and gas reserves?

Paradoxically, the answer is to help their economies become more efficient by encouraging diversification alongside and beyond the oil and gas sector. Promoting democracy destroys any semblance of "energy security," if it ever existed. By contrast, developing the private sector and enabling S.M.E. growth leads to capacity building for individuals, more stability in the market and ultimately, greater assurance of supplies. Engaging with oil-exporting countries because we are forced to for low-cost resources and helping diversify their economies will stabilize these countries in a low-price environment. A far cry from isolation, but a splendid shift, nonetheless.