Introduction
Energy is one of the most important factors of production in virtually every country. In addition, energy is increasingly becoming a political weapon at the global level because of its limited supply. Consequently, the US believes that it must improve its energy security in order to achieve its economic and political objectives.
In this respect, some scholars and policymakers believe that the best way to improve energy security in the US is to increase the supply of oil. This paper disagrees with this perspective by arguing that energy security can be achieved in the US by reducing oil consumption rather increasing its supply.
Discussion
The US Oil Reserves
The argument for the increase in oil supply in the US is mainly based on the fact that huge oil deposits have recently been discovered in the country. The US has approximately two trillion barrels of shale and tight oil reserves in Colorado, Wyoming, and Utah.
Exploitation of the oil reserves has been made possible by technological advancements such as horizontal drilling. As a result, the US is expected to replace Saudi Arabia as the largest oil producing country in the world by 2015. In this respect, proponents of increasing oil supply in the US believe that it will enable the country to eliminate its dependence on oil imports.
The resulting reduction in oil prices is expected to promote rapid economic growth. In addition, reducing oil imports will enable the US to implement its foreign policy and ensure national security without compromising its energy supply.
However, achieving energy security through increased oil supply in the US is not sustainable in the first place. “Only 2% of the tight oil in the US is recoverable”. This percentage is equivalent to approximately a two-year oil supply in the US. Therefore, the oil resources that can be exploited are clearly not enough to ensure energy security in the country.
The existing tight oil reserves will only reduce dependence on oil imports from 60% to 44% in the next two decades. Moreover, the country’s ambition of surpassing Saudi Arabia’s oil production rate means the oil reserves will be depleted very soon. Thus, increasing oil supply will only be a temporary solution to the country’s energy problems. As a result, the US will face a severe energy crisis in the long-term.
Increasing oil supply in the US is also limited by financial and technological constraints. The technologies that are “used to drill tight oil (fracking and pyrolysis) are increasingly becoming expensive to use”. In addition, new wells tend to run out of oil rapidly.
For instance, the output from tight oil wells often reduce by nearly 69% in the first year and 39% in the second year. Therefore, several wells have to be drilled in order to achieve the desired production level. This will significantly increase the cost of supplying oil. Undoubtedly, oil companies will pass the high production costs to consumers in the long-term. In this context, it will not be possible to achieve energy security since consumers will switch to cheap oil imports to avoid high production costs.
International Oil Prices
The increase in oil production has already resulted into a reduction in oil prices in the US. Therefore, oil producers have to look for external markets to avoid the losses that they are likely to make as increased supply continue to exert a downward pressure on prices.
However, a significant increase in supply from the US will inevitably reduce international oil prices, thereby exposing oil producers to the risk of making huge losses. This risk might be mitigated in the short term by OPEC’s ability to regulate international oil prices by changing its production capacity.
For instance, international oil prices are expected to remain above USD 80 per barrel in 2015 if OPEC reduces its daily output by 2 million barrels in response to increased supply from the US. However, OPEC’s ability to limit its production capacity is increasingly becoming limited due to the financial challenges in its member countries.
Currently, only Saudi Arabia is committed to reducing its production capacity to prevent price declines. Nigeria, Venezuela, and Angola are increasing their production capacities in order to earn adequate revenue to finance their national budget deficits. This means that in the long-term OPEC will resort to a price war with the US in order to sell its oil in the international market. The resulting price decline will make tight oil production in the US unsustainable.
Tight oil production is not viable at prices below USD 70 per barrel. For instance, ExxonMobil realised a 27% reduction in net income due to the 52% oil price decline in 2011 in the US. In addition, Occidental has stopped drilling oil in the US because drilling costs have increased by 22.5% since 2009, whereas prices have steadily reduced.
These examples show that achieving a breakeven will be impossible in the US tight oil industry as international prices continue to decline. Eventually, capital will be shifted to other viable economic activities such as investing in the equity securities market. The resulting reduction in oil production will cause a severe energy shortage in the US since the non-petroleum fuels are not sufficient to meet the country’s energy needs.
Environmental Concerns
Increasing oil supply in the US will definitely result into increased environmental degradation. Low prices will “lead to an increase in the use of oil in production and transportation”. As a result, the rate of greenhouse gas emission in the US will significantly increase.
For instance, the transport sector alone accounts for 44% of oil consumption in the US. Thus, an increase in oil consumption in the industry will force the country to exceed its greenhouse gas emission limits. This problem will be exacerbated by the fact that investing in tight oil will shift capital away from clean energy production because it requires a lot of financial resources.
A rise in the use of oil in the US will be an “incentive to rapidly developing countries such as China, Brazil, and India to increase their greenhouse gas emission rates”. In particular, the US will have no moral basis to prevent emission of greenhouse gasses at the global level if it encourages the use of oil within its territories.
The resulting increase in environmental degradation will cause a significant decline in food production and poor health outcomes globally. This will lead to violent protests from citizens in the US and other parts of the world. Therefore, the best way to ensure energy security in the US is to reduce oil consumption.
The government should begin to transition to an economy that depends less on petroleum products such as gasoline to reduce the aggregate energy demand in the country. Imposing a high tax on gasoline can significantly reduce the consumption of oil in the transport sector because it will increase prices. Undoubtedly, the public will oppose a high tax on gasoline.
Thus, the tax revenue should be invested in research and development to improve access to new technologies that will facilitate production of adequate cheap and renewable energy. This will avert resistance to gasoline taxes. Apart from taxes, “stringent corporate average fuel economy (CAFE) should be introduced”. Moreover, tradable gasoline permits should be introduced to limit the amount of gasoline consumed in the country.
Reducing consumption of petroleum products will ensure energy security by minimizing the risks associated with disruptions in oil supply. Furthermore, reducing oil consumption is a cheaper way of ensuring energy security than increasing oil supply. For instance, automobile manufacturers have consistently reduced the prices of hybrid cars by using new technologies. However, the cost of drilling oil keeps rising. Reducing oil consumption will also help in protecting the environment.
Conclusion
Increasing oil supply in the US will not ensure energy security due to three reasons. First, only a small percentage of the large oil deposits in the US can be recovered in a profitable manner. Second, increasing oil supply in the US will significantly reduce international oil prices.
Eventually, oil production will not be sustainable due to the low prices. Finally, increasing oil supply will worsen environmental degradation. In this respect, the government should focus on reducing oil consumption rather than increasing its supply to ensure energy security.
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