Energy independence for fossil fuels? There's no such thing.

In a world energy market, where companies seek the highest profits, far-away events affect domestic prices. 

Tim Chong/Reuters/File
Malta-flagged Iranian crude oil supertanker 'Delvar' is seen anchored off the coast of Singapore in this March file photo. Western sanctions have depressed Iranian oil sales and prices.

Anyone who tells you that energy independence can be achieved based on globally traded commodities such as oil, coal and natural gas is either trying to mislead you or doesn't understand the structure of energy markets. As of 2011 fossil fuels produced 83 percent of the world's energy according to the U.S. Energy Information Administration (EIA). Because fossil fuels can be transported anywhere in the world, producers seek out the highest price unless they are constrained by law or infrastructure from doing so.

This means that energy independence for a country is something of an optical illusion when it is based merely on the domestic production of fossil fuels. Here's why:

  1. Events far away such as wars; embargoes; strikes; and mine, oilfield and refinery disasters affect the level of domestic prices for fossil fuels in all countries where these fuels are freely exportable regardless of whether that country produces enough for its own consumption. In such countries consumers of these fuels including domestic industry and transportation, commercial establishments, households and government agencies are all subjected to fluctuating world prices that can be unrelated to anything happening in the host country even if the country extracts enough fossil fuel from its own soil to meet domestic demand.
  2. Even fossil-fuel exporting countries that subsidize purchases of fossil fuel energy by businesses and consumers are affected by events outside those countries as prices for their exports are largely determined by external events. The revenue they forgo by keeping domestic prices low is a hidden cost to the energy sector of the economy. Those subsidies mean reduced investment both in new production and in the maintenance of the existing energy-producing infrastructure. That hidden cost grows as energy prices rise if subsidized domestic prices do not rise as well.
  3. Unless fossil fuel companies are owned by a government, those companies focus on maximizing both returns for their shareholders and compensation for their managers. They seek out the highest prices for their products worldwide (adjusting for transportation costs) regardless of the effect on the energy security or energy independence of the country in which the oil, natural gas or coal is produced--unless, of course, those companies are prevented from doing so by law or by the infrastructure. It is disingenuous, therefore, for such producers to tell the public in any country that they are focused on energy independence. On the other hand, government-controlled fossil fuel companies such as those in China actively seek acquisitions in other countries that can serve as suppliers to the home country regardless of the needs of the country those companies operate in.

Let's see how this is playing out in the United States where the oil and gas industry and its financial backers on Wall Street have lately been touting in the media the notion that the United States will soon become energy independent. That same industry is currently seeking permission for oil exports even though U.S. crude oil production of 6.3 million barrels per day (mbpd) this year remains far below U.S. consumption of finished petroleum products including gasoline and diesel of 16.2 mbpd. (To be precise we should subtract U.S. exportsof finished petroleum products of about 2.5 mbpd to come up with a net U.S. consumption figure of 13.7 mbpd which is still far above U.S. crude production). Yes, it's possible for the United States to become free of oil imports; but, the most likely course will be a drastic reduction in oil consumption made possible in part by the electrification of the nation's transportation system and by aggressive conservation measures.

As for the supposed natural gas boom in the United States, U.S. natural gas imports were 12.7 percent of U.S. consumption so far this year, according to the EIA. That's down from an average of 15.7 percent for the 20 years prior. It's progress, but it's not energy independence. Nevertheless, the natural gas industry is pushing ahead with plans for U.S.-based natural gas export terminals which must be approved by the Federal Energy Regulatory Commission (FERC). One terminal in Sabine, Louisiana has already been approved and is under construction. Many more applications are under review

Naturally, the industry will tell you that it is seeking permits for these terminals in anticipation of the day when U.S. natural gas production exceeds U.S. needs. Does that mean they'll hold off exporting gas until that day? Not a chance. Not when liquified natural gas (LNG)--the form in which natural gas is transported by ship--isselling in Japan for $17.30 per million BTUs and $11.83 in Europe (both as of November 30). Compare that to$3.42 for spot natural gas in the United States (the Henry Hub price as of December 21). The profit potential for U.S. producers is too great to pass up.

So, what does this mean for manufacturers, especially those chemical and fertilizer companies that rely heavily on natural gas as a feedstock. They have been moving operations back to the United States because of cheap natural gas prices. If the natural gas industry gets all of its currently planned export facilities approved and built, that would mean 22 percent of current daily production of U.S. natural gas could be exported. This is certainly enough to bring U.S. prices much closer to world prices. If we include all projects identified by sponsor companies but not yet under review by the FERC, the percentage rises to 37 percent of current daily production. Of course, natural gas producers tell us that U.S. production will rise significantly from here even thoughproduction has been essentially flat for a year. That's only temporary, they will say. But should we take their word for it?

And, even if production grows significantly, can we not assume that the producers will simply ask for more export terminals to be permitted so that these producers can capture world prices for natural gas?

So, U.S. manufacturers are in for a surprise if they believe natural gas prices in the United States will stay low because America is moving toward "energy independence." It is the duty of U.S. natural gas producers to seek the highest price for their product. Only two things could stop them: If the FERC ceases issuing permits for export facilities or if the U.S. Congress passes a law preventing the export of LNG. Both seem unlikely.

On the other hand, it may be that there will simply not be enough natural gas produced to justify very many export terminals which require extremely long-term delivery contracts, on the order of 30 years. If American natural gas producers cannot guarantee adequate production to fulfill such contracts over their full period, it seems unlikely that those interested in receiving the gas will be willing to make the necessary commitment to and investment in import facilities. With all the talk about America's vast shale gas deposits, this may seem an unlikely scenario. But a growing number of skeptics have outlined plausible reasons why shale gas will turn out to be much more expensive and much more limited in its production than is currently believed. Keep in mind that it is NOT the size of the resource that matters so much to the daily functioning of society, but rather the rate at which we can extract gas on a daily basis.

So, is there anything that really could make a country energy independent? The answer is yes, and the method is two-fold. First, vast reductions in energy use can be had through retrofitting buildings to the so-called passive house standard. This almost eliminates the need to burn fuel to heat most buildings. Those reductions could also come from changes in the transportation system: more emphasis on public transportation including rail and on ridesharing for drivers. The electrification of most transportation would almost surely be part of any such independence plan. And, we need to reconfigure the way we live so that our cityscapes allow us to work, socialize, and shop nearer to where we live.

Second, we would need to build a distributed energy system, allowing people to gather energy at the individual household and business level. Much of this would have to be renewable energy from wind and solar. Expanding hydropower where possible is another way, particularly small hydropower utilizing the myriad smaller dams which either used to generate electricity or which have never been exploited for this purpose.

This path would require a sustained effort over decades to achieve. But once it is achieved, the country that undertakes this path would never be subject to disruptions of energy supplies in faraway places. And, that country would never have to worry about the inevitable declines in the production of fossil fuels which must come someday because they are finite.

This alternate route to energy independence is rarely discussed as the world continues to fixate on increasing production of fossil fuels as the path to energy independence. But in truth, these fuels only put us further in thrall to fickle global markets and unstable exporting nations while exposing us to the ever present threat that fossil fuel supplies will begin to decline before we've made adequate preparations for an energy transition. Already worldwide crude oil production has been on a plateau since 2005.

If any country really wants to be truly energy independent, a feasible, durable path is already available. All that country has to do is look away from the false advertising of the fossil fuel industry and look toward the future of energy that is already unfolding before us.

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