Energy independence is finally within reach for the U.S., but motorists won’t notice when they pull up to the gasoline pump.
The International Energy Agency, which recently forecast that the U.S. would be “all but self-sufficient” in energy by 2035, also predicts that oil prices will stay high. It expects the world price of oil, currently about $110 a barrel, to hit $125 in inflation-adjusted terms two decades from now. In nominal terms, that will be about $215. (The world benchmark, Brent, currently is priced about $20 higher than the U.S. benchmark, West Texas Intermediate.)
In fact, high prices are what drives the expected increase in U.S. oil production. If prices plummet — perhaps because of another global recession — expensive shale-oil drilling projects would be canceled and U.S. production would level off.
So Americans can take a bit of nationalistic pride in the IEA’s projection that we’ll pass Saudi Arabia in oil production by 2020, but they should count on steadily rising prices at the pump.
“People forget that the supply curve tends to slope upward,” says William O’Grady, chief market strategist at Confluence Investment Management in Webster Groves. “It means, in layman’s terms, that the higher the price, the higher the supply. We have known the shale oil was out there for years, but until prices got high enough, people weren’t willing to make investments in extracting it.”
Although it’s not a windfall for U.S. consumers, the U.S. production boom does have a lot of benefits.
“It does not mean we will have lower gasoline prices, but it does mean we will have more jobs and a stronger economy, and perhaps reduce our military spending,” says James Williams, an energy economist with WTRG Economics in London, Ark.
Some of the jobs will be in the oilfields, and others will be at factories that make steel pipe and equipment for the drillers. An abundance of U.S. natural gas also could create jobs in the petrochemical industry.
The most important effect of U.S. self-sufficiency may be a geopolitical one. If North America is meeting all of its own energy needs, the Middle East becomes less strategically important to us.
“If we decide the superpower role has become onerous and we don’t want to do it anymore, we could get away with it,” O’Grady says. “It would be a pretty terrifying wake-up call for the rest of the world if they learn they’re going to have to defend their own oil.”
That, of course, is looking a long way into the future and speculating about complex strategic decisions. Would we be willing to let China, which has a growing appetite for imported oil, take on a greater role in the Middle East? Or do our concerns about terrorism require us to keep a heavy presence in the region?
We also don’t know if all of the IEA’s assumptions will hold. Will Iraq really account for 45 percent of world oil-supply growth in the next two decades, or will it degenerate into civil war?
When it comes to forecasting oil prices, even the best crystal balls are cloudy. “You have to get all the geopolitical events correct, and that’s almost impossible,” Williams says.
Having said that, he agrees that the IEA has outlined a plausible scenario for the U.S. to gain energy independence, a goal that’s been stated by every president since Richard Nixon.
Many of voters who heard those presidential speeches probably assumed that cheap gasoline would be part of the bargain. Clearly, it isn’t.