In his recent speech at North Carolina State University, President Obama noted that domestic oil production in the U.S. last year exceeded the country’s imports of oil for the first time since 1994. This will likely come up again in the State of the Union address, particularly since upstream activity is contributing to employment and income growth in ways few other sectors are.
“Because of an all-of-the-above strategy for American energy,” the President announced, “for the first time in nearly two decades, we produce more oil here in the United States than we buy from the rest of the world."
The notable milestone was achieved through a combination of demand reduction and domestic production growth. The former (reduced demand) is a statement about both improved efficiency and the state of the economy in recent years. The White House has cited the ruling on fuel economy standards as a principal factor in reducing US demand. Indeed, efficiency gains have been important in abating demand recovery after 2008, but a lackluster economy for the last 5 years has played a substantial role in keeping demand from significantly rebounding. The latter (domestic production growth) is a direct result of innovation in the field and the regulatory institutions that exist in the U.S. that facilitate ease of entry for capital in the upstream (literally thousands of firms). In fact, were it not for the regulatory infrastructure that exists in the U.S. we would not be in the midst of the current oil boom; this is often lost in the discussion. Nowhere else in the world is like the U.S. in this space, and despite large resource assessments in other parts of the world, nowhere else is in the midst of such robust upstream development.
With the issues related to rising domestic crude oil production finally capturing national attention – highlighted by the recent release of Senator Murkowski’s white paper on US energy exports last week – the Obama administration has begun to engage in more public diplomacy around its “all of the above” energy strategy. Certainly, growth in domestic energy production has been a driver of economic activity in an otherwise dismal economy over the last few years, but the credit for the recent success is not owed to the current administration, or any recent past administration for that matter. The regulations and market institutions that are in place for domestic producers – such as companies being able to negotiate directly with landowners for mineral rights on private lands, open access to pipeline infrastructure, etc. – generally date back more than a couple of decades. Even the technological innovations that have led to rising production from shale resources dates as far back the late 1940s, when the first commercial hydraulically fractured well was completed, and a DOE program that was initiated during the Carter Administration when energy security was paramount as the nation was concerned about running out of oil and gas resources. Nevertheless, thanks to some $5 billion in budgetary funding for energy research at the Office of Science, White House representatives credited the current administration with supporting the innovations in drilling technology that opened up development of resources in Texas and North Dakota, even though activity began in those regions prior to Obama taking office.
The energy industry in this country is in a period of regeneration. Unconventional resource development has grown more rapidly in the US than anywhere else in the world, and it has triggered a renaissance in America’s energy and manufacturing sectors. As the president prepares for several key decisions over the coming months, he will be forced to reevaluate America’s energy balance once again. Interestingly, this point was most recently raised last Thursday by a coalition of 18 prominent environmental groups in a letter urging the president to alter his decision criteria and reconsider the “all of the above” strategy before making decisions on Keystone XL, fracking on federal lands, and offshore drilling in the Arctic. Such pressure is growing, and, whether viewed as good or bad, it certainly runs headlong into the ongoing American energy renaissance.
The announcements of the Administration will weigh heavily on the energy direction the country takes. The energy business is characterized by large upfront fixed costs and long lead times to production and revenue streams, so tomorrow’s energy mix is a product of investment decisions made today. Regulations and policies play a hefty role in driving market developments, and can, if consistently being pushed to be substantively changed, introduce a source of uncertainty to the businesses that operate within that market, including the refining and petrochemical sectors. By most counts, greater uncertainty plays to a negative outcome for producers and consumers alike.
The “all of the above” approach to energy policy is, on its face, a noble goal that seeks to engage across party lines. The strategy has elicited support from Republicans and Democrats, as well as from an interesting array of local industries and political groups. But, the objective of low cost energy for consumer groups in order to spur economic activity cannot be lost in an effort to tilt the competitive landscape to favor one energy resource over another. So, the decisions that the administration makes in its final two years will have impacts beyond 2016, much as decisions of several previous administrations have shaped where we are today.
Post by Kenneth B Medlock III, Senior Director, Center for Energy Studies, Rice University’s Baker Institute, and Keily Miller, Research Associate, Center for Energy Studies, Rice University’s Baker Institute.
