Energy Policy: What We Need to Talk About

As the political rhetoric surrounding U.S. energy “independence” heats up, it is worth pointing out a few things to help provide much needed context. After all, there are plenty of things at play here in the coming months and years—resource access and regulatory policy, fuels choices, infrastructure build out, industrial policy, imports and exports, tax and investment decisions, the role of nuclear, subsidies for alternatives, efficiency priorities, SPR policy, environmental concerns and the use of energy as a geopolitical or foreign policy tool. Whew!

For starters, the United States is already over 80 percent (up from 70 percent a decade ago) self-sufficient when it comes to energy production and use. We are routinely described as the Saudi Arabia of coal, and have the largest nuclear fleet in the world. We are the world’s largest natural gas producer and the third-largest oil producer. Renewables account for roughly 10 percent of our energy mix and we have in place a variety of efficiency standards, mandates and incentive programs. That said, our transportation fleet is more than 94 percent dependent on liquid fuels, mostly petroleum based, and as oil is a globally traded commodity, changes in worldwide supply and demand consequently impact U.S. consumer prices.

In an attempt to limit that impact, we have routinely looked to conservation, fuel switching, and CAFE standards to alter the demand curve; and to incentives, access, technology improvements, alternative fuels and higher prices to stimulate additional supplies. In times of crises, we have utilized the Strategic Petroleum Reserve (SPR) to infuse the system with additional incremental oil supply. At the time of writing, largely as a result of the unconventional (shale gas and tight oil) revolution, U.S. oil production is at its highest level in decades. Natural gas has eclipsed the previous output record set back in 1973. Oil imports comprise less than 46 percent (down from 60 percent) of total consumption, and refined product exports are averaging almost 3 million barrels per day, giving our refining sector an enormous “value add.” Projections indicate that we will be a net exporter of natural gas (and possibly oil) in the not too distant future.

Last year, fossil fuels (coal, oil and natural gas) accounted for roughly 80 percent of global energy consumption. Renewables, including nuclear, made up the rest. And while the growth in solar and wind has been enormous, the base remains small and intermittency and infrastructure challenges remain large. Yet, in the wake of Macondo, Fukushima, and the shale gas and tight oil revolutions, the energy landscape is rapidly changing. Higher prices and technology applications at scale are producing a revolution of their own—namely in the ability to access huge unconventional oil and gas resources both here and abroad.

And this phenomenon is creating a new American energy reality, allowing the nation to increasingly become more energy self-sufficient, achieve a significant reduction in our imports/balance of payments, and concurrently create an engine for economic growth, a platform for technology and innovation, job creation, new tax and royalty revenues, and the revitalization of domestic industries.

But realizing this vision requires that policymakers successfully tackle a number of complex issues. Here are what I believe are the most important:

Resource access and development policy: The United States is resource rich when it comes to energy forms, so the issue here is how much do we make available for development, at what price, over what period and under what type of regulatory regime? Outside of the central and western Gulf of Mexico, much of America’s offshore oil and gas resources are presently off limits, although there are plans being worked on to develop offshore wind energy systems. Federal lands require (by statute) a number of alternative use and conservation/preservation considerations and we are now only beginning to consider scalable Arctic development, including lands in Alaska. Environmental policy to preserve and protect lands, species, water, air and safety requirement for developers are also critical considerations. Prudently weighing trade-offs are key challenges for policymakers.

Onshore, in the lower 48 states, issues surrounding well integrity, hydraulic fracturing, water use, treatment, recycling and disposal of waste water, community impacts, emissions and other environmental and safety concerns are currently the focus of both state and federal regulators and will need to be resolved collaboratively with producer/operators and other stakeholders to allow the large scale development of our enormous unconventional resources.

Infrastructure build out: This is a key consideration for realizing the benefits of the current boom in unconventional oil and gas development. Crude oil needs to get to refiners and natural gas to utilities, industrial customers, processors and other end users. That requires pipeline interconnects and new midstream infrastructure and involves permits, environmental assessments and managing “above ground” impacts of local communities through which pipes and railways travel. As investments here are bound to be enormous, regulatory certainty and confidence in a timely and predictable permitting process (while allowing for public input) are critical as lead times are significant and failure to construct key infrastructure leads to bottlenecks and stranded resources.

Fuel choices and the use of mandates and incentives: Power generation, industrial uses, feedstocks, transport and heating/cooling account for the bulk of domestic energy usage. With ample new supplies of fossil fuels on the horizon, policymakers will be confronted with the choice of how and whether to employ federal tools (e.g., subsidies, mandates, incentives, etc.) to stimulate fuel diversification choices and support nascent industries, an especially tricky proposition in an era of reduced federal budgets, but one which needs to be discussed in the context of near and longer term diversification and cleaner future fuels and transport options. The role of nuclear energy going forward is an obvious issue here as the high cost of entry and competition from low cost gas in a low demand growth future makes such new investments infeasible strictly on economic grounds. The future of coal, ethanol (the “blend wall” discussion is coming) and renewables also require some hard choices. And the issue of incentives and subsidies requires an examination of current tax rates and other preferences and special provisions.

Export policy for oil and gas: Under current law, refined petroleum products are widely permitted. LNG exports require regulatory approval particularly as they relate to non-FTA countries, and crude oil exports are permitted under certain conditions. With the projected influx of both lighter domestic crudes and Canadian oil sands, Gulf coast refiners will be pressed to match incoming crude quality with existing processing equipment (see infrastructure discussion above) and product demand needs. Capabilities of Jones Act vessels to efficiently move waterborne volumes between U.S. markets and the ability to export more costly or unneeded crudes are issues worthy of a robust policy debate.

The management, composition and use of the SPR: As we approach an era of oil self-sufficiency or limited import exposure, reexamining the utility, size, composition and use of the Strategic Petroleum Reserve (along with a series of other statutes and policies conceived in time of markedly different circumstances) is also warranted. At nearly 700 million barrels, the value of the current reserve approaches some $70 billion. As import volumes continue to decline, the size of the reserve could be reduced without sacrificing deliverability in times of short duration disruptions.

Reconciling the perpetuation of fossil fuels with climate needs: While climate change seems to have disappeared from the current public debate, the consequences of perpetuating large scale fossil fuel use into the next century require a reevaluation of strategies designed to minimize the impacts of greenhouse gas emissions or implement adaptation policies in the not too distant future. So far, we seem to be, except on the margins, in an “either-or” debate. But achieving a truly sustainable and secure energy future while preserving quality of life standards requires that we confront this issue head on in a clear-eyed way.

The ability to access these enormous unconventional resources has produced significant economic and security benefits, but also exposed some considerable risks and challenges. Ingenuity and technology, well timed investment and research can help mitigate some of these adverse impacts. However, responsible development, prudent policy and effective regulation can together provide the framework for allowing this development to move forward in a way that affords us the breathing space to develop and dispatch the next generation of cleaner burning/lower carbon fuels.

(Reprinted with permission from the October 17, 2012, edition of CNN Global Public Square.)

Frank A. Verrastro is senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary isproduced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2012 by the Center for Strategic and International Studies. All rights reserved.