Energy to Spare

With an Arab Fall if not Winter dominating the Middle East, the U.S. is under pressure to intervene even more. Unfortunately, reliance on imported oil continues to entangle Washington in the Middle East’s volatile politics. Some analysts advocate more subsidies for alternative energy in response. It would be better to free North America’s abundant natural resources, providing the U.S. with a brighter economic future.

Americans have endured multiple energy “crises” centered on the Mideast over the last four decades. Arab oil producers imposed an embargo during the Nixon administration, which had bizarrely discouraged domestic production with price controls. President Jimmy Carter created the Department of Energy, which paradoxically did more to discourage than promote energy development.

President Ronald Reagan eliminated oil price controls, but had to wait for Congress to remove natural gas restrictions. After the Iran-Iraq war threatened to disrupt oil shipments from the Gulf, Washington “red-flagged” Kuwaiti oil tankers and provided American military protection for petroleum shipments. Succeeding administrations promoted subsidies for alternative energies and promised to reduce U.S. dependence on Mideast oil, with little practical result.

Today the Obama administration continues to back the embarrassing Gulf kleptocracies led by Saudi Arabia because they are major oil producers. Unhappy with this dependence, President Obama pushed even bigger subsidies for other energy sources. This corporate welfare wasted hundreds of millions of dollars on federal support for private companies such as bankrupt Solyndra.

Alternative energy production is up, but remains largely irrelevant to meeting Americans’ energy needs. “Their overall contribution to world supply remains de minimus and stays that way (even though it is still growing rapidly) in every credible future scenario,” explained Mark P. Mills, an Adjunct Fellow at the Manhattan Institute, in his recent study, “Unleashing the North American Energy Colossus: Hydrocarbons Can Fuel Growth and Prosperity.”

Coal, natural gas, and oil remain the least expensive and most convenient fuels. That’s why they supply more than 85 percent of energy today. There are technical alternatives to these energy sources, but no economic alternatives. While politicians and environmentalists continue to proclaim alternative fuels as a panacea, Mills explained that “The game-changing technologies that have emerged involve hydrocarbons: natural gas, oil, and coal.”

Nor is enforced conservation any solution. With the rise of China, India, and other emerging markets, the U.S. matters ever less in determining world energy prices. While three decades ago America accounted for roughly one-third of the world’s energy consumption, observed Mills: “Today, however, the U.S. has dropped to below 20 percent of world energy demand; and before three decades pass it will fall to under 15 percent. As a result, going forward, global markets and prices will be increasingly disconnected from domestic U.S. energy consumption behavior, whether virtuously voluntary or punitively policy-driven.”

Obviously, there is a technical limit to the world supply of hydrocarbons. However, contrary to common myth, the world is not running out of energy. Rather, advancing technologies now allow access to supplies once beyond reach. Explained Mills: “Technological progress in hydrocarbon exploration and development has been transformative and is ongoing, enabling the emergence of a new era of hydrocarbon production, which is, in turn, unleashing the capability to efficiently tap into North America’s enormous resources of natural gas, oil, and coal.”

Examples include improved materials and information technology, better ability to find and map supplies and extract resources, directional drilling, and the much discussed hydraulic fracturing. It isn’t just natural gas and oil. Noted Mills, new technologies have “also driven a near doubling in the coal sector’s productivity in the past two decades.”

Energy discoveries overseas have received significant public attention and will prove beneficial. However, there also is much good news closer to home. Mills explained that “Technology has unleashed staggering quantities of commercially exploitable reserves of these fuels, especially in the United States and its neighbors in North America.”

The U.S. once was viewed as a permanently declining energy producer. In 1978 the U.S. Congress even approved the Fuel Use Act, which limited consumption of natural gas, the supplies of which were constrained by federal price controls. This mentality of scarcity drove the Carter administration to launch its disastrous War on Energy, highlighted by pervasive regulations and massive subsidies. Unfortunately, this myopia continues to dominate Washington, as Mills detailed in another Manhattan Institute study, “Liberating the Energy Economy: What Washington Must Do.” He pointed out that today’s federal policies have “evolved unintentionally to become complex, overreaching, and often capricious.”

America no longer is energy poor. “The United States is now the fastest-growing producer of oil and natural gas in the world,” observed Mills in “Unleashing.” America is expected to pass Russia as an oil producer by 2020.

Americans could produce even more energy if the U.S. government freed up access to existing resources. The U.S. alone is estimated to possess 30 billion barrels of oil reserves based on current technology. Total resources are far greater and will yield even more recoverable supplies as technology advances.

Off-shore oil deposits add even more. Mills explained: “The technically easy-to-access — if not politically accessible — oil in Alaska’s off-limits ANWR and the Gulf of Mexico would, in the short term, essentially triple existing U.S. oil reserves.” New technologies have dramatically improved the ability to find and develop these resources.

Even more significant is shale oil. Reported Mills: “The Green River Formation, for example, a shale region largely beneath Colorado, Wyoming, and Utah, contains an estimated 2,000-3,000 billion barrels of oil,” of which between 30 and 60 percent is estimated to be recoverable with existing technology. Alberta, Canada’s oil sands are estimated to contain another 2,000 billion barrels of oil — which could come to the American market with the approval of the Keystone Pipeline project.

Indeed, count Canada and Mexico and the continent becomes an energy colossus. Mills observed: “North America has total hydrocarbon resources that are some four times greater than those found in the Middle East. The geology of North America is profoundly hydro-carbon rich.”

Allowing firms to develop these resources would offer several important benefits. The first is economic. Mills pointed to significant current gains for North Dakota from oil and Texas from natural gas production. Estimated benefits for Utah and Wyoming from oil and natural gas production are expected to run some $400 billion over the next 15 years. Extracting oil from ANWR and the outer-continental shelf could generate $1 trillion in benefits. Freeing the energy industry would mean jobs, wages, sales, and tax revenues. All of those would be useful for a nation suffering from anemic economic growth, persistently high unemployment, and massive government deficits.

Moreover, America’s energy industry spreads its rewards broadly. Noted Mills: “Economic benefits from expanding hydrocarbon production will be felt widely given the structural and geographic diversity of hydrocarbon resources and the associated industries. In contrast to other parts of the world, benefits here won’t flow to a handful of oligarchs but will involve thousands of businesses and ripple broadly throughout the economy.”

Given America’s falling share of international energy demand, reducing imports wouldn’t have much impact on global energy prices. Rising demand in China, India, and other emerging markets could easily overwhelm any downward pressure on prices.

However, there would be a political benefit from reducing hydrocarbon imports (America is unlikely to ever entirely end oil imports). Even though the energy marketplace is international, presidents from Richard Nixon to Barack Obama have mistakenly treated the Middle East as a vital security interest because of U.S. dependence on oil. That has led to support for thuggish monarchies and frequent wars. An expanding and diversifying international energy marketplace would make it easier to convince Washington to lay down the sword. If the Europeans, Chinese, or other significant oil consumers want to take over Gulf guard duties, let them. The U.S. should reduce the size and cost of its military and, more importantly, the risk of conflict.

To obtain this bright future government merely need reduce barriers to existing energy production. Mills posits an even more abundant energy future, however. He asked: “what would happen if policies were enacted to accelerate and encourage even greater expansion of North American hydrocarbon production and to expand access to the vast tracts of federal lands that sit atop staggeringly large resources? Why not push beyond self-sufficiency to energy influence, even dominance?”

The benefits of doing so are obvious. Allowing an already important industry to greatly expand and turn into a significant export market would offer significant economic rewards. Moreover, higher energy production could moderate global energy prices and reduce the reliance of other nations on the Middle East and other unstable and/or undemocratic energy states.

Concluded Mills: “Economic research noted earlier finds about $75 billion in broad economic benefits for every billion barrel of oil produced (or oil-equivalent in hydrocarbons). This would imply that the aggregate 100 billion barrels of additional hydrocarbons extracted and sold over the next two decades in the accelerate scenario would yield over $7 trillion of value to the North American economy, with $5 trillion of that accruing to the U.S.”

There are no obvious technological or economic barriers to this future. Nor are any government subsidies required. Rather, the problem is political, especially access to federal land. “Vast tracts of hydrocarbon-rich resources are either entirely or effectively off-limits to development,” with a steady decline in new natural gas and oil leases on federal land since 2006, explained Mills. In “Liberating the Energy Economy” he cited problems of regulatory “complexity,” “creep,” and “capriciousness.” In response he offered a deregulatory agenda, emphasizing agency accountability, access to federal lands for exploration and development, and rationalizing legal challenges to development. Among his suggested policy changes were removing barriers to exports and creating “a single federal portal for approval of all major energy projects,” similar to that employed by Canada.

Nevertheless, opposition to an abundant energy future remains strong. Environmental concerns rank high, but just as new technologies make energy extraction more economical, they also make energy extraction more ecological. The argument that development should proceed responsibly is no reason for not letting it proceed.

Americans can see the potential of an energy-rich future. In “Unleashing” Mills concluded that “The world will need enormous quantities of hydrocarbons in the future, regardless of and despite substantial gains in energy efficiency and alternative energy deployment. No single region of the world could make as significant a difference to the supply dynamic as could North America.”

Uncle Sam should get out of the way and allow the rest of us to get to work.

Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).