Unlocking America’s Potential Energy

America is in the midst of one of the most significant energy revolutions in modern history. Due to the recent discoveries of vast reserves of shale oil and natural gas, the U.S. is in a position to become the world’s largest energy producer by 2015, surpassing both Saudi Arabia and Russia – combined. This momentum, however, can only continue if U.S. firms are allowed proper flexibility to explore, extract, and export shale oil and natural gas from U.S. territories. Government regulations covering drilling practices, such as fracking, must be re-examined and equitably altered such that energy companies may pursue their energy interests while satisfying environmental concerns. The energy revolution has critical implications for U.S. domestic and foreign policy with the potential to transform America’s economic prowess and energy self-sufficiency for years to come.

Current estimates for America’s resource endowment and extraction rates are very promising. Natural gas production is experiencing a momentous boom due to recent breakthroughs in unlocking natural gas trapped in shale. With these advances, shale gas production is forecast to increase from 42% of total U.S. gas production in 2007 to 64% in 2020. This level of growth is unprecedented, with the U.S. Government estimating there will be a 44% increase in total shale natural gas production from 2011 to 2040. With regards to oil production, the International Energy Agency predicts that U.S. oil production will rise to 11.6 million barrels per day in 2020, up from 9.2 million just a few years ago. This increase in oil production is orthogonal to trends in Saudi Arabia and Russia, which will see their production levels decline from 11.7 million to 10.6 million barrels and from 10.7 million to 10.4 million barrels, respectively. Leonardo Maugeri at Harvard has estimated that shale oil production alone could reach 5 million barrels per day by 2017. These statistics stand as a dramatic reversal from discussions in the energy community even 5 years ago when talk focused on declining fossil fuel reserves and the need to explore alternative forms of energy. Fossil fuels now dominate the energy game, and rightfully so.

While sound environmental concerns do exist regarding shale oil and natural gas extraction, such as pollution of groundwater and the effect of mining towns on surrounding communities, they are often overblown. For example, in Pennsylvania only 3% of all wells were cited for flawed construction from 2008-2013. Fracking has been a successful extraction method since 1940, and new technologies – waterless fracking is a good example – have only made the process safer and more efficient. The most legitimate environmental concern associated with fracking has to do with the well casings that surround the fracking apparatus. Since fracking pumps water and sand into the ground at a high pressure, improperly made well casings and other sealants can crack causing leaks which pollute the surrounding environment. This problem could be solved by using stronger and properly fitted well casings. Simple environmental regulations at the state level requiring proper well construction, specifically emphasizing casings, could ameliorate many of the environmental concerns associated with fracking. There is also a surprising lack of publicly available data regarding the effects of fracking operations on the surrounding environment. Increasing the availability of this data by setting mandatory reporting requirements would fully inform nearby communities and government authorities. Fracking to extract shale oil and natural gas can be done safely; such has been the trend thus far. If a more relevant, simple, and fair regulatory regime were to be established by state governments, and perhaps the federal government, to address issues such as well casing construction and reporting requirements, fracking’s safety and efficacy would only be further reinforced. Regardless, fracking – as it stands today – is a no-brainer.

Why is fracking already a no-brainer? Because the shale boom, which has been enabled by fracking methods, is having tremendous economic benefits for the U.S. Natural gas prices in the U.S. are some of the lowest in the world – half the price of gas in Europe and less than one-third the price of gas in Asian countries. Surging shale oil extraction has overloaded Gulf refineries and revived East Coast refineries. This increased supply is so shocking that domestic oil prices have lately fallen out of sync with global oil prices, and experts predict a U.S. oil “glut” if U.S. firms are not allowed to export crude oil. This abundance has critical implications for manufacturing in the U.S. Indeed, The Economist claims that the energy revolution is resulting in a “Factory North America.” This “Factory” is resulting in more domestic jobs across all industries, especially in the growing energy industry. Energy jobs in nearly every state have doubled since 2005. Some equate the fracking boom as being similar to a gold rush, with energy jobs offering high salaries for basic work in rural areas. David Petraeus seems to be on track when he claims we are about to enter the “North American Decades” powered by our new-found energy endowments.

While the macroeconomic benefits of America’s increased energy output are clearly tremendous, expectations for the average American consumer should be tempered. Though the price of natural gas has fallen in recent years due to our ability to tap into previously inaccessible shale reserves, the cocktail of booming transportation, a recovering economy, and rising exports have raised prices in the past year. In addition, the need for further fracking R&D is likely to drive costs up in the coming years. Shale oil is experiencing a similar phenomenon. Although the price of gasoline has fallen beyond global pricing levels in the U.S. for the short-term due to surging supply, the price of oil is determined on a global energy market and is projected to increase for the long-term as global demand continues to increase. The increased supply of natural gas and oil certainly has lowered costs for the American consumer for the time being, and will continue to do so when contrasted to an America without new-found energy reserves. However, Americans should not be expecting $2.00 per gallon gasoline prices anytime soon.

So what does this energy revolution mean for U.S. foreign policy? Many good things. America’s increased self-sufficiency will change the U.S.’ relationship with many other countries. Because of surging domestic supply, the U.S. will be less dependent on other nations for energy; in turn, this freedom will afford the U.S. greater flexibility in pursuing foreign policy interests because it will not be as constrained to secure energy resources abroad. Strategic relationships with nations such as Saudi Arabia and the United Arab Emirates are likely to change because there will be less of a need for their oil imports. Perhaps the U.S. will now be more forceful in advocating for democratic reforms within these non-democratic states now that it has greater autonomy on the energy front. In addition, the decreasing need to secure energy resources abroad may prevent the U.S. from becoming involved in regional disputes and conflicts to secure those interests.

America’s surplus of energy could also be an excuse for a more active role in foreign policy. America could gain more influence over other nations if U.S. firms are allowed to export energy resources. As we have seen in Europe, Russia’s domination of energy resources in Eastern Europe has enabled it to turn build new allegiances at the EU’s loss and expense. Consider the notable cases of Armenia and the Ukraine becoming part of Russian-led Eurasian Union. Please note that this author is not advocating for the U.S. to pursue an overbearing approach to energy exports like Russia, but rather a stable level of influence to help the U.S. realize its foreign policy objectives. If, for example, the U.S. could export to Central Asian states, it could gain more influence in the region and build a relationship that could allow these states to become closer to the West rather then being forced into a Eurasian Customs Union led by Russia. In a state like Japan, where natural gas sells for $17 compared to $3 in the U.S., greater exports from the U.S. could enhance a trade relationship with a major partner. Unfortunately, the U.S. is not reaping the benefits of energy exports because antiquated laws are in place that prohibit U.S. firms from exporting crude oil. In addition, the EPA has been very slow to grant export license requests for liquefied natural gas. These regulations are contrary to free market principles and concepts of free trade that America has advocated for since its inception. The U.S. government needs to allow U.S. firms to export and pursue their global energy interests more freely. The potential results of this policy change would provide more flexibility in U.S. foreign policy and would afford the U.S. even greater influence on the international stage.

This energy revolution will change America’s game, and for the better. Domestically, the U.S. will be more self-sufficient and experience the growth of an industry while boosting employment numbers (and therefore jobs) and observing lower energy prices. Internationally, America’s influence will extend to the importers of our energy, and there will be less dependency on other states for energy. These benefits, however, cannot be fully experienced under the current structure. State governments, and perhaps the federal government, need to formulate a simple and fair regulatory regime that will allow U.S. energy firms flexibility in fracking to unlock shale oil and natural gas while addressing legitimate environmental concerns such as well casing construction. The U.S. must also break its own barriers to exporting energy, such as the obsolete laws that currently prohibit U.S. firms from exporting crude oil from U.S. territory and the slow process of obtaining export licenses for natural gas. Only if these policy measures are implemented can America’s full energy potential be unlocked.

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