It’s now reasonably certain that North America can become self sufficient in energy by 2020.
Self sufficiency in oil, natural gas and coal production, greatly benefits the United States, but it doesn’t necessarily achieve energy independence.
The United States benefits from self sufficiency by greatly improving its balance of payments with the near elimination of payments to foreign countries for their oil. Producing oil in the United States also increases tax and royalty payments to the state and federal governments. It also increases jobs in the oil patch, at refineries and in all the supporting industries, such as steel mills that produce drill pipe … and in an expanded chemical industry.
Self sufficiency, however, doesn’t necessarily mean energy independence. We are largely energy independent with respect to natural gas and coal, because these commodities are not a significant part of the world market. For example, North American natural gas is currently isolated from the world market. Coal, from North America, is available on the world market, but domestic prices are mostly set by domestic supply and demand.
Oil is different – prices are primarily set by the world market.
There are some price differences due to imbalances in transportation, such as between Canada and Cushing, Oklahoma, and between West Texas Intermediate (WTI) crude, priced at Cushing, and Brent North Sea crude. There are also differences due to quality, e.g., heavy oil vs. light crude.
There currently is a price differential, favorable to the United States, between WTI and Brent, of approximately $14.
While prices for natural gas and coal are mostly independent of world markets, the price of oil in the United States is primarily set by worldwide supply and demand.
World supply and demand is largely influenced by what happens in China and Saudi Arabia. Growth in other countries and oil produced by other OPEC nations also affect supply and demand.
World supply and demand is currently roughly in balance at around 90.5 million barrels per day (mb/d). In the immediate future, China’s growth is uncertain while Saudi Arabia maintains output at around 1.5 mb/d below its capacity to keep supply and demand in balance.
Longer term, the IEA1 forecasts that growth in China and elsewhere in the world will increase demand to around 110 mb/d by 2035, which means supply must increase by around 20 mb/d.
It’s conceivable that North America, including Canadian tar sands, could produce about half of the new supply.
But, much of the new supply is projected by the IEA to come from the Mideast, including substantial increases from Iraq – where much of Iraq’s oil flows through the Strait of Hormuz. Over 20% of the world’s oil supply currently flows through the Strait of Hormuz, and that isn’t likely to change dramatically.
With demand increasing by 20 mb/d, and with the Mideast remaining a major supplier of oil to world markets, any disruption to Mideast supply will reverberate around the world in higher prices.
To protect itself, the United States cannot avoid playing a role in the Mideast. The United States, for example, must be concerned with what happens in Saudi Arabia.
Hopefully, other nations can increase their roles in the Mideast, especially the EU that has largely remained aloof, while being dependent on Mideast oil.
There is the potential for misunderstandings as other nations assume some responsibilities in the Mideast. For example, China could likely begin to play a role in the Mideast to protect its interests. China’s interests may not always coincide with the interests of the United States.
Achieving self sufficiency will be a great boon to the United States, but will not mean the United States can divorce itself from what happens in the Mideast.
Notes:
- IEA, April 16, 2012
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