American Energy Independence: Let the Betting Begin

With US oil demand falling thanks to high prices fuel efficient vehicles and domestic crude and natural gas supply rising thanks to unconventional production, energy analysts have begun speculating that policymakers’ long-elusive goal of “energy independence” might be within reach. In this note, we provide a roundup of recent government and industry projections and will explore what these various American energy futures mean for the US economy and national security in the weeks and months ahead.

A Rapidly Changing Energy Landscape

The search for “energy independence” has preoccupied American policymakers since the 1970s oil crisis. Energy analysts have long doubted the feasibility of this objective and many have questioned whether it’s even a worthwhile goal (see here, here and here for background discussion).  But over the past several years, the US has moved rapidly in that direction. The share of American energy consumption supplied by imports has fallen from 30% in 2006 to 17% since 2006 (Figure 1). And in their most recent Annual Energy Outlook (AEO), the Energy Information Administration (EIA) reduced their projection for US foreign energy dependence in 2030 to 11%, one third the level forecast in their 2006 Outlook.

Most of this downward revision occurred on the demand-side, not the supply-side. A combination of high oil prices, CAFE standards and energy efficiency programs have curbed EIA’s 2030 demand forecast by 29 quadrillion btu relative to the 2006 outlook, or 21%.  But over the past couple years, upside surprise in domestic oil and gas production thanks to a combination of high oil prices and industry innovations (Figure 3). EIA upward revised their 2030 projections for onshore US domestic oil and gas production by 26% and 44% respectively, more than offsetting a downward revision in offshore production following the Macondo spill in the Gulf of Mexico.

And More Room to Run

Recent private sector estimates are even more bullish than the 2012 projections from the EIA. Last fall, the National Petroleum Council (NPC) released a massive study on American oil and gas production potential. They examined a range of scenarios, but in their “unrestricted” development case, they see US crude oil output growing to 10.25 million barrels per day (mbpd) by 2035, up from 5.9 million barrels per day today. And the unrestricted scenario sees US natural gas production growing by 50% by 2035 as well. And then last week, veteran oil analyst Ed Morse and his team at Citigroup released a study titled “Energy 2020: North America, the New Middle East” and a corresponding op-ed in the Wall Street Journal. The Citi report sees the US hitting 10.2 mbpd of crude production by 2020, not 2035, and another 5.3 million bpd of domestic biofuels and natural gas liquids (NGLs) supply, provided unforeseen technical challenges or political obstacles don’t get in the way. Citi also projects growth in US natural gas output will reach 27.7 trillion cubic feet (tcf) by 2020, levels the EIA doesn’t see occurring until 2035.

I’ve compared the NPC and Citi supply projections to the EIA’s 2012 Outlook and the most recent projections from the International Energy Agency in Figures 4 and 5 below. Four caveats to keep in mind. First, the IEA and EIA projections are integrated supply-demand assessments, meaning they dynamically model the impact of increased energy supply on energy prices and the impact of changes in energy prices on energy demand. To the best of my knowledge the NPC and Citi assessments do not. Second, the projection time interval varies between the studies. The EIA data includes values for every year of the projection period while the IEA and Citi data is in five-year increments. The NPC study provides comprehensive assessments for 2035 only. I’ve extrapolated between assessment years in Figures 4 and 5. Third, the liquids supply projections from EIA include crude oil, condensates, NGLs, biofuels and refinery processing gains.  The IEA includes crude oil, condensates and NGLs, and Citi includes crude, condensates, NGLs and biofuels and the NPC includes crude, condensates and NGLs. In Figure 4 I’ve adjusted the IEA, NPC and Citi estimates of “liquids production” to match the EIA definition. And fourth, the four projections are looking at slightly different things. The EIA projection assumes no new policy beyond what was adopted at the beginning of 2012. The IEA projections assume that currently proposed policy is adopted (“New Policies Scenario”) and the NPC and Citi estimates are upper-bound projections of what’s possible given the nature of the resource and the economics of production.

Moving the Finish Line

In Figure 6 below, I’ve attempted to standardize the EIA, IEA, NPC and Citi projections into a consistent energy dependence metric. This is a bit challenging, as the NPC doesn’t provide specific demand outlook and the Citi report includes one only for gasoline and diesel. So I’ve used the EIA demand estimates for the  NPC and Citi projections (adjusting for Citi’s gasoline and diesel numbers). NPC and Citi also do not include supply projections for coal, nuclear or renewable energy, so I’ve included the EIA supply forecasts for these sources. The result? The EIA and IEA projections have the US still dependent on imports for 11% and 10% of total energy consumption respectively. The NPC oil and gas supply projections turn the US into a net energy exporter right before 2035 using the EIA’s demand estimates. And Citi has the US achieving balanced energy trade sometime between 2015 and 2020.