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Oil Embargo Anniversary Is Reminder of Uncertainty in Energy Sector

10/16/13

Abraham Energy Report

By Secretary Spencer Abraham

As we mark the 40th anniversary of the OPEC oil embargo which prompted alarms in the United States about energy shortages, many energy commentators today are discussing whether there is a coming U.S. oil “glut.”  This underscores the one certainty about the energy world over the past 40 years—and that is its uncertainty.

In 2001 I became energy secretary. During my tenure, energy was constantly on the front burner and it seemed as if there was never a moment when a major crisis wasn’t staring us in the face.  On the day I took office California was experiencing rolling blackouts.  Next we had the Enron scandal and collapse.  This was followed by 9/11 and its complete disruption of energy markets, the Iraq invasion and its similar disruption of the energy sector and the 2003 blackout.

Beyond these crises—and in part because of them—we were trying to address America’s growing dependence on imported gas and oil along with the geopolitical and economic ramifications of that dependence.

When I took office, natural gas had emerged as a “fuel of choice.”  It was relatively inexpensive, produced fewer emissions than fuels like oil and coal, and was considered safer than nuclear power.

By the time I left office, the price of natural gas had begun to rise.  Forecasts predicted that prices would continue to rise and that the United States’ domestic reserves were not going to be able to keep up with the increasing demand. In fact, we anticipated slowly becoming dependent on imports to meet the natural gas demands of the new century.  In response, we began to meet with major gas producers to determine what the United States had to do to facilitate more imports.

This projected growth in natural gas imports had huge geopolitical ramifications, so even as we were assessing how to lay the groundwork for more imports, we were also analyzing the challenges that a more import-dependent America would face. In the period after I left the department, the situation became even more acute.  Natural gas prices rose into the double digits in September of 2005 and the U.S. Energy Information Administration (EIA) was projecting little long-term price relief for consumers.   

Yet, today some are now debating whether the United States should permit large amounts of natural gas exports.  In the past few years the use of hydraulic fracturing and horizontal drilling has identified huge quantities of new natural gas reserves in various shale formations across the country.  These discoveries have increased technically recoverable U.S. natural gas reserves to 2,431 trillion cubic feet (Tcf), up from the 2005 estimate of 1,341 Tcf.  Moreover, forward projections of gas prices now suggest that lower prices will continue well into the future. These discoveries, as observers know, have totally changed the U.S. energy equation, yet were unthinkable just a few years ago.

Just as we have seen a complete transformation with regard to natural gas, we have also witnessed a similar change to the oil sector and for many of the same reasons.  When I served as energy secretary, analysts and government officials waited with nervous anticipation every time OPEC met.  Would they raise or cut production?  Would they change their target price band from $22-$28 per barrel to $24-$30?  Every adult American knew we were at the mercy of these decisions and understood what an oil shock would do to the economy.

Both during and after leaving DOE, I worked on the challenging issue of how to handle growing dependence on foreign oil from both from a technological and geopolitical perspective.  With EIA 2004 forecasts suggesting that oil imports would constitute 70 percent of our consumption by 2025, we needed both alternative fuels and a strategy for dealing with this looming dependence.  

During my term at the department, we explored and invested in everything from advanced hybrids to clean diesel to hydrogen fuel cells to cellulosic ethanol.  It seemed that every year a new “breakthrough” technology emerged as a sort of new “flavor of the moment.” Congressional backers made sure each new approach got a fair share of research money by diverting monies from the previous “flavors.”  Little progress was made on any front because none received the money and attention needed to be fully developed.  Addressing our growing oil dependence seemed beyond our reach.

But, as with natural gas, the picture has changed dramatically. U.S. domestic production has rapidly grown in recent years, up from 5 million barrels per day in 2008 to 6.5 million barrels per day in 2012, according to the EIA.  While domestic production has been expanding, demand has been falling; in 2012 the nation used 18.5 million barrels per day, down from 20.8 million barrels per day in 2005.  This decline is due to higher prices (what we wouldn’t give for a return to the days when we worried that oil prices might rise from $28 to $30 per barrel!), a weak economy and the introduction of more fuel- efficient vehicles.  Meanwhile, we are seeing a decrease in U.S. dependence on oil imports.  In 2005 the United States relied on imports for 60.3% of oil.  In 2011 that number was down to 44.8 percent, and in six years the EIA anticipates that imports will drop even further to 34 percent.

The lesson of all this is that energy markets are not really that predictable.  Relatively speaking we are in a crisis-free environment right now, but that could change suddenly. What we take to be extremely good news in terms of domestic production of oil and gas could be reversed overnight if we adopt government policies that undermine the opportunities handed us, or fail to realize that our energy infrastructure is in strong need of revitalization. And then there are the countless other unforeseeable challenges that we will contend with in the years ahead.

Which brings me back to my original point—that the only thing about energy you can predict is its unpredictability.