ACPI’s Marco Pabst on the effects of US energy independence

With oil prices seemingly on the rise towards a record $150 per barrel mark, driven by geopolitical as well as supply-side problems, the issue of the US dependency on oil and foreign supply is again moving to the fore.

Despite being one of the largest oil suppliers in the world, the US produces less than half the oil it consumes.

The country has been a net importer of energy for many decades with a first peak reached in the midst of the oil crisis in 1978, at 21% of its energy use.

Following a more than 20-fold rise in oil prices in the 1970s and early 1980s, net energy imports collapsed to under 10% by 1982, but they started to recover quickly and began their uninterrupted ascent to nearly 30% in 2005.

Currently, the US has to satisfy approximately 20% of its energy demand through imports.

However, in terms of oil, the dependency is much higher. While in the 1990s, the US imported two thirds of its oil, this number has fallen to a still staggering 50%, with one third of it delivered from Canada and Mexico, most of the rest from OPEC and Persian Gulf countries.

Massive shale gas discoveries, the emergence of LNG technology, improving fuel and energy efficiency, and a changing energy mix, are expected to change this picture dramatically in the future.

It appears that by the end of this decade the US could become a net exporter of energy to the world.

This would have considerable consequences for the US balance of payments, the US dollar and global financial markets.

Net oil imports of approximately 10 million barrels per day at current prices would explain $400bn of the US trade deficit. This is almost exactly equal to the expected US trade deficit for 2012.

Warren Buffett once characterised the US trade deficit as “a bigger threat to the domestic economy than either the federal budget deficit or consumer debt”.

While temporary trade deficits are not harmful, sustained deficits cause major global imbalances. This can be witnessed between Germany and Greece or China and the US, for instance.

Such imbalances cause massive surpluses and a strong currency on one side and the exact opposite on the other. Difficult political relationships such as those with Saudi Arabia ensue, which have various implications for the relationship with other third parties.

In order for the US to become energy self-sufficient it would have to change its energy mix and increase the efficiency of its energy use.

 

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