02/08/2013 04:38 pm ET Updated Apr 10, 2013

Independence -- From Rational Analysis?


Crude Oil: What Evidence and Logic Says about 'Energy Independence'

There's hardly a day that goes by anymore when we don't hear some story reinforcing the idea that the United States has entered a new oil boom and in only seven years we'll have achieved energy independence. Agencies such as the Energy Information Administration (EIA), the International Energy Agency (IEA) and organizations and institutions like Harvard University, and Citi Group have all hailed the new 'tight oil' formations in the United States as enabling an energy-independent America by the year 2020. Unfortunately, an examination of American consumption patterns and the underlying fundamentals of global oil supply expose the impossibility of such claims. A continued belief in these unsubstantiated claims could have a decidedly negative effect on the U.S. economy.

First, a few critical facts about American oil consumption. According to the EIA, as of last November, the U.S imported 8.1 million barrels of oil per day (mbd). Last month the EIA projected that by 2020 the U.S. would still have to import 35 percent more than we can produce just to meet domestic demand: by any definition, that is not 'independence.' But buried in the EIA report was a fact that shows how perilous our situation beyond 2020.

The report notes on page one of the Executive Summary, that even if we succeed in reaching the highest total oil production target of 7.5 mbd, by 2020 U.S. production will begin "declining gradually to 6.1 million bpd." In other words, even according to the EIA's optimistic hopes for tight oil production, the U.S. will reach 2020 still requiring imports to meet 35 percent of our daily needs, but then begin a decline thereafter!

Yet there are other publicly available sources of information which not only expose the impossibility of reaching 'independence' by 2020, but indicate the potential for a near-term supply problem.

Bloomberg reported late last month that after seven consecutive quarters of slower economic growth, China rebounded in the final quarter of 2012 with nearly 8 percent growth, and are expected to "keep accelerating through at least the end of September." Bloomberg also reported last week that owing to an improving U.S. economy, domestic demand for crude increased and along with the increased demand for oil in China, had caused a four-month high in oil price. Further, most analysts project Indian economic growth to approach 6 percent in 2013, resulting in a further stress on global demand for crude oil.

The 'ace in the hole' for most has been the assumption that Saudi Arabia will increase its production of oil so that while the U.S. is moving towards independence, the Kingdom would provide for the rest of the world. To support this view, Saudi Crown Prince Abdulaziz bin Salman told Bloomberg on January 29th "We will maintain our current oil exports levels for the next twenty years and beyond despite the rise in demand," the minister said. "Those who are forecasting the kingdom to turn into an oil importer are ignorant bordering idiocy."

The same Bloomberg article noted that total Saudi capacity was 12.5 mbd, that the Kingdom produced 9.57 mbd in December, and they exported 7.1 mbd. The Crown Prince also projected that over the next 17 years, he expects Saudi Arabia's domestic consumption to increase by 4 mbd above current levels. Since there are no plans to increase capacity, it is a virtual certainty Saudi exports will not remain at current levels, but decline in proportion to the increase in domestic use as has been the case for the last decade.

Evidence is mounting that the world is having a hard time now to meet global needs, much less 20 years from now. The implications of that fact are profound for our country. With oil prices already near $100 for West Texas Intermediate (and Brent at $117 as of 8 February) it won't take much of a hike in prices to put the brakes on the small improvement our economy has made.

We are still trying to discover ways to eliminate trillion-dollar annual budget deficits while trying to reduce the weight of existing debt. In order to achieve either goal, our economy must grow and for a sustained period of time, even with budget cuts and increases in taxation. But if the price of oil continues to follow supply and demand fundamentals as it has for the past several decades, the price could rise to levels in the near future that will inhibit growth, thus profoundly compounding our ability to reduce debt.

We are presently able to keep our economic ship afloat because of measures like quantitative easing and asset buying by the Federal Reserve. But that is only possible because inflation has been kept in check and the Fed is able to keep the price of money artificially low with near-zero interest rates. Inject into that messy process an increase in the price of oil that the Fed cannot control, the result will be the cost of doing business increases, revenue decreases, and an already challenging economic situation deteriorates further.

It is well beyond time when we must stop deluding ourselves with claims that all is well with our energy security and begin to take serious steps to address the likely looming problems. There is ample and readily available evidence to confirm that the United States won't achieve anything close to energy independence by 2020. Failure to address these problems now will postpone them until there is a legitimate crisis later. Without action the fundamentals will impose themselves on us whether we like it or not.