Falling Crude Prices Reveal The Flaw Of `Energy Independence’

Author

Loren Steffy, Contributor

October 31, 2014

The declining price of oil is exposing the flawed notion of energy independence. Global crude prices have fallen 25 percent since June, and the price of West Texas Intermediate crude, the U.S. benchmark, hovers around $80 a barrel. The price decline comes as U.S. oil output hit its highest in three decades.

At the current prices, some producers are beginning to worry that shale wells, which use the expensive hydraulic fracturing process, may become too expensive to drill, at least in some parts of the country. While we haven’t seen a significant pull back yet, it’s a reminder of that the U.S. is unlikely to ever produce all the oil it consumes.

As I’ve pointed out before, despite politicians breathlessly talking about energy independence, the U.S. still imports about half of the oil it uses. That point often gets lost in the debate over whether to lift the 40-year ban on U.S. crude exports, but the export issue is related to refining capacity, not overall consumption. At the same time, U.S. posted the biggest increase in oil production of any country last year, surpassing 1 million barrels a day. The U.S. Energy Information Administration expects U.S. production to reach 9.6 million barrels by 2019.

That has enabled us to cut back on imports, which combined with weak demand from China and little impact from geopolitical unrest in the Middle East has resulted in an abundance of oil on the world market. Saudi Arabia recently indicated it has no plans to reduce its production, and other OPEC producers are likely to follow the kingdom’s lead.

In other words, just by reducing our imports by 34 percent from their peak in 2005,we affected prices on the world market to the point that our domestic drilling boom may soon become too expensive to be economical in the current price environment.

It’s unlikely we could ever increase or maintain production at a high enough level domestically to offset the other half of our imports, but even if we found the capital, the reserves and will to do so, we would drive world prices so low that our domestic drilling efforts wouldn’t be affordable.

In all likelihood, we are looking at a very different market. While global crude prices may remain low for the near term, global demand for energy isn’t likely to slacken over the long term. Even as we pursue conservation efforts and alternatives at home to reduce our oil demand, other parts of the world will be ramping up their need for oil.

As a result, there’s a good chance that prices not only will recover, but may even remain well above $100 a barrel. When that happens, the fracking boom may return.

But either way, the current decline in prices is a reminder that the idea of energy independence may play well in political circles, but it doesn’t reflect reality.

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