Thursday, November 3, 2011

Is Energy Independence The Path To U.S Economic Growth?

The shipping lane in the Strait of Hormuz is only two miles wide. While 75% of the oil tankers passing through this chokepoint are headed to Asia, its closure would lead to a huge spike in the price of oil and damage the economies of all oil importing countries. As shown on the map, Iran sits astride the strait and could easily strike at shipping passing through it. Given the prospect that Israel might carry out military action against Iran, concerns are justified that Iran could close the Strait of Hormuz as a reaction to being attacked.

The vulnerability of a chokepoint that 17% of all worldwide traded oil passes through is just one reason that the U.S. would benefit from a focus on energy independence via replacing imported oil with domestic gas. Others include:

1) job creation
2) long term savings as the cost of imported oil continues to climb
3) reduced pollution due to replacing oil with natural gas
4) reduction in dollars flowing out of U.S.
5) enhanced security of energy supplies

While the phrase "drill baby, drill" sets off knee jerk antipathy for many, unfortunately it may be the only way out of our economic morass. Is the prospect of an ever worsening cycle of declining living standards more appealing? Is the prospect of huge cuts in social security benefits for anyone born after 1955 more appealing? Does the prospect of reducing pollution by replacing imported oil with domestic gas make the idea of "drill baby drill' less loathsome?

An oil industry commissioned study projects oil-and-gas development could add 1.1 million U.S. jobs over the next decade and bring in $36 billion in federal revenues by 2015. This is a job growth plan that makes some of the plans floating around that are based on increased government spending or revisions to the tax code seem rather mundane.

While the "peak oil" story has been knocked off the front page by the huge off shore finds of the last couple of years, we are almost certainly on the verge of "peak cheap oil". Oil is unlikely to fall below $70 a barrel for a prolonged period of time unless demand declines sharply. Given the world's population growth and the expanding demand for oil by Asian nations, increased dependence on expensive to extract oil seems assured. The cost of spending on energy is already eating up an increasingly large share of household budgets. Thus, taking advantage of the availability of domestically produced natural gas could benefit the economy by protecting U.S households from inflating energy costs and also give U.S manufacturers a competitive advantage.

Of note, the growth in natural gas production in the U.S has been in large part due to the Energy Policy Act of 2005 explicitly exempting fracking from the requirements of the Safe Drinking Water Act, the Clean Air Act, and the Clean Water Act. According to The Casey Research Energy Team, "the Halliburton Loophole, as it has become known, enables gas companies to pump millions of gallons of fracking fluid into old wells or to leave the fluid evaporating in open pools, without having to identify the chemicals in the fluid. Those chemicals include benzene, toluene, boric acid, xylene, diesel-range organics, methanol, formaldehyde, and ammonium bisulfite".

Finding reasonable compromises between protecting water supplies and reducing methane pollution with be critically important to: 1) expanding the use of natural gas; and 2) ensuring that switching consumption from oil to natural gas produces a net environmental benefit. Unfortunately, the timetable for the EPA's highly anticipated Final Hydraulic Fracturing Study Plan has the initial research results not being released until the end of 2012 and the final report not being released until 2014. If hard core environmentalist get their way and ban fracking, the consequences for the U.S. economy could be devastating.

For a more information on the subject of why Shale Gas Reserves Could Reignite U.S. Economy, check out the well written article on the subject by Paul Barrett.


Restoring U.S. job growth and avoiding an economic catastrophe by curbing the deficit will require numerous difficult hard to swallow trade offs. However, pushing hard for energy independence may be the most promising path to a booming economic future. The obstructive tactics of the hard core environmentalists that desire a future with reduced economic activity must be overcome.

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