Will the U.S. Squander Its Energy Bounty?

Almost every aspect of the U.S. energy landscape is changing drastically — except government policy. Consider: The global price of oil has soared to more than $100 today from $30 a barrel in 2004. As a result, the U.S.’s annual bill for oil imports has risen to $365 billion, even though domestic oil production has jumped in the past two years to 7.5 million barrels a day from 5.5 million barrels.

Meanwhile, the price of natural gas has plummeted. The tight shale gas boom in the U.S. has caused the domestic price of gas to drop to less than $4 per million cubic feet today from $10 per million cubic feet in 2010. By replacing a diesel or gasoline engine with one that accommodates compressed gas, Americans can drive for the equivalent of 50 cents a gallon.

A similar revolution is under way in the solar industry. Solar panels that cost $7.50 per peak watt a few years ago can now be had for less than $1 per peak watt. Conventional utilities fear not only that their legacy coal-fired and nuclear plants are fast becoming white elephants, but also that their customers will become competitors, producing electrons for sale from cheap rooftop solar panels.
Change Avalanche

The exception to this avalanche of change is Washington: It has barely acknowledged the revolution. Neither the Barack Obama administration nor the Republican Party offers a coherent vision of how to exploit these new energy realities, including cheap natural gas, which is poised — but still only poised — to be used as a prime transportation fuel. The broad outline of a new, comprehensive energy policy, one capable of restoring vigor to the economy while revitalizing middle-class jobs, is abundantly apparent. Yet no one in Washington seems willing to acknowledge the shape of things to come, let alone sketch in the details.

Congress has not passed significant energy legislation since 2007, before many of these trends emerged. It cannot muster the will to do so now. The oil and gas industry has a clear strategy for driving up U.S. fuel prices — employing the mantra of “free trade” to export U.S. oil and gas over the objections of major domestic manufacturers such as Alcoa Inc. (AA) and Dow Chemical Co. (DOW)
Illustration by Neil Donnelly

Illustration by Neil Donnelly

Although U.S. laws prohibit exports of crude oil (to prevent upward price pressure), oil from the Bakken and Eagle Ford shale formations is now routinely exported. The American Petroleum Institute has initiated a campaign to remove the export ban, arguing that U.S. refineries will be unable to handle increased production.

The U.S. Department of Commerce has bought it, ruling that, with Gulf Coast refineries committed to processing Canadian crude, the U.S. lacks sufficient refinery capacity to crack U.S. light oil. Meanwhile, the department has quietly been issuing export waivers to appease the industry.

The result is that we now export cleaner, cheaper U.S. light crude and import heavier, more expensive Canadian bitumen. It’s hard to see how these exports help the U.S. economy: We get higher oil prices and environmental risks; Canada gets the profits.

The case of natural gas is even more perverse. Despite intense proselytizing, the marketplace has not sorted out the role natural gas should play in transportation, and the federal government has, if anything, undermined its great potential as transportation fuel. Both economics and environmental quality argue for large fleets of gas-powered vehicles. That vision, however, will require greater infrastructure and capital investment to support. If big capital investments are instead made in export terminals for liquefied natural gas, export contracts will trump development of LNG transportation infrastructure. The first in line calls the tune.
Substantial Premium

If the U.S. fails to make a determination about the role of gas in transportation, a decision will nonetheless be made for it. Export contracts are typically 20 years and require foreign customers to pay whatever the price of gas is in the U.S. plus 15 percent. If buyers find cheaper gas elsewhere, these contracts require them to pay a heavy penalty — so heavy, in fact, that they will probably keep buying U.S. gas even if the cost doubles. U.S. consumers would likewise end up paying a substantial premium over current prices. In effect, once gas-export terminals are built, cheap U.S. gas prices can be maintained only if foreign customers leave a surplus for the domestic market.

The Obama administration claims that it can revoke export authorizations if exports cause price surges. Yet that would require breaking contracts, which trade agreements make a dubious proposition. Indeed, the Department of Energy has thus far refused to specify what circumstances would trigger a cancellation — despite requests from Congress to do so.

Market realities suggest that if global prices rise, U.S. prices will rise with them until our dramatic price advantage over European competitors, who now pay three times what Americans pay for natural gas, evaporates almost completely. As a result, the price advantage of gas over oil will also sharply narrow, and the opportunity to replace imported oil with domestic gas in trucking fleets may be lost. Likewise, the shift in industrial power from dirty coal to cleaner gas stands to be reversed, along with the economically beneficial decline in home heating and cooling costs.

“America’s natural gas bounty is more than a simple commodity,” Dow Chemical Chairman and Chief Executive Officer Andrew Liveris has said. “It’s a once-in-a-generation opportunity for America to export advanced products, not just BTUs.”

Not all the signals from Washington are negative. New Energy Secretary Ernest Moniz has promised to evaluate natural gas export proposals comprehensively, rather than one by one. Obama has signaled new caution about the export-oriented Keystone XL pipeline. Meanwhile, Senate Energy Committee Chairman Ron Wyden is pushing ahead with a series of hearings exploring the issues.
Ideological War

At the same time, congressional Republicans appear determined to handicap vast swaths of the U.S. economy in favor of securing windfall profits for the oil patch. The infrastructure investments that would enable the U.S. to reduce its dependence on foreign oil, which are broadly supported by American business, have been blocked by Republicans’ ideological war on federal spending. And no one from either party seems eager to question the impact of pending trade agreements on the U.S.’s ability to leverage its oil and gas resources domestically for competitive advantage.

The U.S. has the resources and technologies to transform its economy and ecology, re-establish U.S. manufacturing strength, and cut our debilitating dependence on oil from the Middle East. Such a policy would also make progress combating climate change. But with one major political party captured by dirty energy interests and the other often blinded by its commitment to trade doctrines that promote energy exports over a domestic value-added economy, our dysfunctional political system has put a second American Century at risk.

(Carl Pope is a former chairman of the Sierra Club. This is the second of two essays.)

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