Promises, promises

January 4, 2013

'The most disappointing part of the empty energy pledges made by both candidates is that cutting oil imports does very little to address oil prices.'

The US election is now over. However, from what the candidates said during the long campaign it is unlikely that a different energy future for the country would have emerged if the result had gone the other way. Energy has become an unfortunate ideological slogan trumping its enormously important role in a society and economy such as the US.

It's disappointing that at this juncture of sluggish economic growth and high oil prices President Barack Obama and his challenger governor Mitt Romney insisted on promising panaceas to improve America's energy future.

Throughout the campaign, both candidates focused on energy independence, which made for great sound bites but is unattainable. Obama stuck to his green energy pitch and to cutting back on oil imports, while Romney proposed regional energy independence. The problem with both is that they don't address the biggest concerns in term of energy security: prices of the commodity and the cost of environmentalism.

But the other side of the energy conundrum is even more problematic: high energy prices. After all, how can America defend its global interests with its economy in shambles? The most disappointing part of the empty energy pledges made by both candidates is that cutting oil imports does very little to address oil prices. US oil production costs, thanks to regulations and environmental compliance, are some of the world's highest.

The EIA is predicting a flat demand of liquids through 2020 as increased domestic production offsets decreasing imports. That means the American economy will spend just about the same amount of money on liquid fuels through 2020, regardless who has been elected or how successfully the candidates meet their promises, albeit more domestic production allows for more of that money to stay home and for more jobs to be created.

According to multiple private and government reports, every $10 increase in the price of a barrel of oil sustained over a year translates into a GDP contraction of 0.2% and around 120,000 less jobs. If sustained for two years, the exponential effect translates into a GDP contraction of 0.5% and around 410,000 less jobs.

Furthermore, the US and global economic growth strains if it spends more than 9% of GDP on energy, a rare episode with two precedents: the first after the Iranian Revolution when global prices spiked and the second right before the global crisis of 2008 when prices reached nearly $150 a barrel.

After a lull, prices in 2012 are once again rising toward the 9% of GDP mark, illustrating just how dangerously the global economy is flirting with another downturn.

promises

Obama promises to extend and embolden current policies to cut down on oil imports and to promote alternative forms of energy. 'If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone,' Obama said at the Democratic convention.

But it's unrealistic that the US can halve current imports of nearly 8 million b/d to lows not seen since 1986, so it's safe to assume that Obama's commitment referred to some other timeframe, most likely 2008, before the first year of his administration began. If that's the case, Obama is promising to cut imports to around 5.5 million b/d by 2020, which is still unlikely, although not impossible. In its 2012 Outlook through 2035 released in June, the EIA predicted net crude imports would plummet 4 million b/d by 2020 from 2008 to around 7 million b/d.

The thing is, Obama can't take credit for this. The two main reasons for plummeting crude imports between 2008 and 2020 (equivalent to around 2.5 million b/d) are almost entirely the result of increased domestic crude production (equivalent to 1.7 million b/d) and from fuel production (equivalent to 0.5 million b/d). The remainder comes from other non-petroleum sources.

The credit for increased domestic crude production goes to the private industry operating in private lands after years of developing new technologies to extract tight oil from shale formations. And as for renewable fuels, it's true that government subsidies have spurred production, but it's not Obama's doing, and it's debatable whether there is even a net gain from biofuels, considering the cost of production.

As for Romney, his campaign promise was simply ludicrous. He pledged that by 2020 the US would only import energy from Canada and Mexico. That means very little because it doesn't address oil prices whatsoever and very little in terms of net oil imports. It just suggests that it's safer to depend on two countries, rather than a myriad of them.

This goal is unachievable from just about every point of view. Canada will indeed increase export capacity by 2020, but most analysts expect any additional supplies will offset falling exports from Mexico. That means that the US would have to increase current domestic liquids productions by at least an additional 3 million b/d.

Romney said this was achievable by opening up exploration acreage and transferring regulatory oversight to the states. This is highly debatable simply from a technical standpoint, but the biggest firewall is that it would require bipartisan support and a reassessment on environmentalism, a nonstarter. Four more years of energy frustration was inevitable. OE


Michael J Economides is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE's position.



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