America Energy Independence

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Includes: BP, DBE, JJE, ONG, RGRE, RJN, UBN
by: Euan Mearns

Editor's note: Originally published on 30 May, 2014

Talk of the USA becoming energy independent, even exporting oil and gas, is very much in the news. Indeed the turnaround from ever rising energy imports to declining energy imports has been spectacular (Figure 1) and on current trajectory it does indeed appear that the USA could become energy independent in a decade’s time. Everyone knows that shale gas and shale oil have liberated the USA from dependency on Saudi crude (Figure 2). Less publicised is the fact that U.S. energy consumption succumbed to high energy prices and has been in steep decline since 2007 (Figure 3). Indeed, 45% of the fall in energy imports is down to reduced consumption.

The USA remains the Queen of energy waste to Canada’s King. U.S. citizens consume double the energy of those in the U.K. The energy system remains dominated by fossil fuels that account for 87% of all energy consumed. New renewables account for only 2% and in electricity generation solar accounts for a mere 0.7% as reported by BP[1].

But the USA is on a new energy trajectory, arguably more sustainable and perhaps heading for Maximum Power [2].

Figure 1 The USA imports a lot of oil and some natural gas from Canada. Both oil and gas imports have declined sharply in recent years. The U.S. has been a coal exporter since 1981 and exports have recently been on the rise as domestic electricity production has switched to natural gas.

Data

All of the energy statistics reported here are drawn from the 2013 BP statistical review of world energy [1]. The economic and population data are drawn from the United Nations National Accounts Main Aggregates Database [3] and World Bank [4]. All data sources are referenced on charts.

Figure 2 From the energy production stand point, the USA is in much better shape than Europe producing a surplus of coal and nearly self sufficient in gas. It is oil consumption that vastly exceeds domestic production. The peak in U.S. oil production was back in 1971 standing at 11.3 mbpd compared with 8.8 mbpd in 2012, so there is still a way to go before the 1970 peak is past. And with oil consumption running at 18.6 mbpd, the USA still imports 53% of oil consumed. There is a way to go before oil independence is achieved, but overall, the trend of U.S. energy production is quite definitely up on the back of shale oil and gas production. Nuclear and hydro combined are significant but new renewables make only a negligible contribution to total energy production.

Figure 3 USA primary energy consumption has been in decline since 2007 in part due to recession, but mainly due to the 5 fold increase in oil price since 2002 – the two factors are of course linked. This decline in energy consumption mirrors those seen in post 1974 and 1979 oil price shocks. These oil price shocks were caused by Middle East wars. This time the cause is global energy supply growth being outstripped by demand growth and energy prices are more likely to increase than decline in future. Declining energy consumption has become a hallmark of OECD economies.

Figure 4 USA low carbon energy consumption grew significantly in the 1970s, 80s and 90s with the growth of nuclear power. It is rising once again on the back of new renewables although the latter still contribute very little to the whole energy mix.

Figure 5 The breakdown of U.S. energy consumption in 2012 shows how fossil fuels still dominate. Only 2% comes from new renewables.

Trouble in the shale patch

The recent growth in U.S. oil and gas production (Figure 2) is down entirely to shale oil and gas. The hope in the USA and globally is that this new bounty will provide the energy independence and security that is so much prized. However, some well-informed commentators like Art Berman and Rune Likvern have been warning for some time that the shale industry may be a bubble inflated by debt. This recent report in Bloomberg gives some forewarning of potential trouble brewing in the shale industry that I will return to in a future post.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

No problems here that $150 / barrel can’t fix. On the other hand, interest rates at 5% may kill the goose completely.

Electricity

Figure 6 After decades of steady growth U.S. electricity generation stalled in 2007 and has been flat to trending down since then. Higher prices will be part of the story but the trend is difficult to reconcile with a growing population and economy (Figure 8). Better energy efficiency standards may also be at work but I am left wondering to what extent Green policies may interfere with the growth of the U.S. electricity system with conventional thermal generation in retreat.

Figure 7 Electricity generation is dominated by conventional thermal – coal, gas and nuclear. Renewables make up only 7% of which 2% is hydro. The USA should perhaps follow Germany’s lead and give up on this imposed energy transition sooner rather than later.

Population and economy

Figure 8 One thing that sets the USA apart from European peers is that population has grown strongly since 1970 and continues to do so. This is largely a function of immigration policy. The fact that the continent still has a lot of space combined with the knowledge that population growth may drive GDP growth is one reason why the USA has typically enjoyed a higher growth rate than European peers. The 2008 / 09 recession is plain to see but unlike many European countries (except Germany) the U.S. economy has recovered strongly setting new year on year highs.

Figure 9 One of the major ills of the USA that affects the whole world, is the gigantic structural trade deficit the country has run since 1975, the last year to have shown a surplus. The cumulative deficit stands at $9 trillion. In 2012, the USA imported 9.65 m barrels oil per day costing $352 billion at $100 / barrel. The trade deficit that year was $547 billion of which oil imports made up 64%. This huge deficit and reliance on Middle East oil has created military and economic tensions globally. I have never understood why the USA did not take steps to curb oil consumption and avoid these tensions that all must live with.

Figure 10 Another sign that all is not well in the USA is the fact that per capita GDP has been static since 2007. Per capita energy consumption is in decline from extreme high levels, which is a good thing, but the likely cause is high energy prices. Is per capita energy in decline because per capita GDP is static? Or is per capita GDP static because of high energy prices? I suspect the latter.

Figure 11 This chart cross plots the data shown in Figure 10. The expectation is that energy is required to produce GDP and GDP growth should require growth in energy consumption. Mature OECD economies appear to have escaped the thermodynamic reality that energy is required to do stuff or make things. Improved efficiency, selling imported goods and phantom GDP created by banks and city boys on Wall Street figure among the reasons the USA appears to be defying gravity. The context of this chart become clearer in Figure 12 where the USA is compared with other nations.

Figure 12 This chart remains a work of art in progress. All interpretations may be subject to future revision. For those readers who have not been following along, each country data series is a time series beginning in 1980 and ending in 2012. In this chart I am plotting per capita gross national income (GNI) purchasing power parity (NYSE:PPP) which is an adjusted form of GDP that accounts for aberrations created by exchange rates and other national factors. In general terms it is expected that trends should rise from lower left to upper right as GNI and energy consumption rise in lock step with time (economic growth). The mature OECD economies are breaking the rules with their vertical rise.

The key observations for the USA are 1) on a per capita basis, they use far more energy than any other country I have looked at so far, 2) the recent trend is for increasing GDP with declining energy consumption and 3) the USA currently has the highest GNI per capita of any of the countries I have looked at. Is the USA in Utopia? The dashed lines are lines of equal efficiency at converting energy to GNI. The upper dashed line appears to be some form of upper limit ($11,500 per toe). Turkey is as efficient as Germany in converting energy to GNI but Germany uses more energy and is therefore significantly more wealthy.

I am speculating here that this upper boundary of converting energy to money has something to do with Maximum Power [2], a subject I know little about. But on Earth, the country that uses most energy most efficiently will ultimately rule the world. Vladamir watch out.

Energy Independence

So, is the USA heading for energy independence? I suspect not. Shale is expensive to produce and eventually the grade will decline requiring even more effort. But then again it is difficult to ignore American ingenuity and hunger for C-H bonds. Higher energy prices are required that must at some point sow seeds of inflation and if interest rates are raised it may kill shale stone dead. The world changed in 2001 and again in 2008. It is very difficult at this point to call what the future holds.