As a job-creator who sold his small business to pursue a Ph.D. in Economics, I was thrilled to learn that the centerpiece of the Romney/Ryan economic plan is energy independence. The United States’ reliance on foreign sources of energy has contributed greatly to our national debt and frequency of wars overseas. As almost any expert will agree, producing more American energy will enhance our security, lower energy prices (marginally), and make U.S. businesses more competitive and more likely to create jobs. Energy independence is obviously a desirable goal, but every president since Richard Nixon has sought to achieve energy independence, and failed. A President Romney, unfortunately, would not achieve much more than the presidents before him.
After spending several weeks studying hundreds of pages of material about the much-touted ‘Shale Gas Revolution,’ and other academic sources cited in the Romney/Ryan Energy Plan, I wanted to present 10 sets of data in graph form to help any remaining swing voters make a more informed decision.
1) World energy demand
Because America has a free market system, U.S. presidents have limited control over energy and energy prices. In a market economy, the laws of supply and demand are the primary influences on the quantity of energy produced and the price we pay for our utility bills and gasoline fill-ups. America imports more energy than we produce, because oil shipped from the Middle East costs less than pumping oil from the remaining nooks and crannies underneath America that still have oil. Our production of U.S. oil rose in recent years, because rising global demand in the face of higher supply costs abroad caused prices to rise above the cost of tight oil production in the United States.
2) Natural gas prices
The major bright spot in the above graph is the huge decline in natural gas prices over the last four years. While Obama doesn’t deserve credit for the technological improvements in drilling that largely made low prices possible, it is important to note that natural gas prices overseas are five times higher. We can thank the Obama administration’s slow permitting of export terminals for keeping those prices low. Ironically, the very regulations and slow permitting processes that Romney plans to eliminate are a prominent factor in keeping American natural gas prices low.
3) U.S. oil production
The actual Romney/Ryan Energy Plan calls for North America to be energy independent by 2020, not for U.S. energy self-sufficiency. This means that the U.S. will still import oil from Mexico and Canada, but will finally be free from dependence on the Middle East. That’s a good thing.
Unfortunately, the entire Romney/Ryan campaign rhetoric about being an energy superpower is premised on the unreasonably optimistic assumptions of a sensational report by Citi Financial called “Energy 2020, North America, the New Middle East?” Romney and Ryan also pull some tidpits out of another much-hyped paper by an Italian Oil Company Executive, Leonardo Maugeri, who is respected enough to lecture at Harvard.
However, Romney’s energy plan leaves out the uncomfortable facts underpinning Leonardo’s research, while touting the results of the Citi report that makes a number of assumptions that seem quite unreasonable. Above is a representative graph from the Citi paper, showing a drastic reversal in U.S. oil production after 40 years of declines
4) Growth in global energy supply
One of the most important lessons for anyone attempting to predict the future is that “past results do not guarantee future performance.” This truth is illustrated well by looking at all the failed IEA forecasts for the growth in the global supply of energy. The black line shows the actual path of global energy supply.
5) Mexican oil production
The Citi paper had internal contradictions, such as this graph of actual Mexican oil production that shows production declines in 2011 and 2012. For North America to achieve energy independence, the Citi paper assumed that Mexico’s production would increase over this same time period as Mexico suddenly gave free reign to U.S. drilling companies.
6) Upside potential
Similarly, the Citi paper assumed that we would produce a lot of oil, we haven’t even discovered yet. This is called “upside potential.” To reach North American energy independence, the Citi paper expects that we’ll produce over 1.5 million barrels of undiscovered oil per day from just the gulf of Mexico by 2020. To give an idea of how big of an assumption this is, the entire state of Alaska is currently producing only 0.5 million barrels of oil per day.
7) U.S. energy consumption
Leonardo took a more nuanced approach, lumping biofuels and natural gas into his total for U.S. oil production. But Romney’s plan never mentions that Leonardo also said that U.S. energy independence will only happen if the price of oil remains higher than $70/ barrel. (Gas prices roughly above $3/gallon.) Both Leonardo and Citi also agreed that U.S. consumption of energy will need to stay on its trend of structural decline in order to reach energy independence.
For Romney to achieve his goal of energy independence, gas prices must remain high, and consumption, a major driver of economic growth in the United States, must continue to decline.
7) Natural gas price vs. rigs
Romney’s plan to open our national parks (federal land) to energy production will probably only slightly lower prices, because private companies only invest in profitable energy production. When Romney opens up energy extraction in new areas, energy companies will only start production if marginal costs are lower than marginal revenue. If costs on federal land is low, this could lead to a further decrease in drilling in states like Pennsylvania.
With natural gas prices so low, the graph above shows what is already happening to drilling activity in the United States.
8) Lowering rates of consumption
The best way to reduce U.S. consumption of energy without lowering our standard of living is to use energy more efficiently. Obama has been a clear leader in partnering with U.S. auto companies to double fuel efficiency standards by 2025, and provide tax credits for investments in energy efficiency. Increasing fuel efficiency lowers demand for gasoline, which puts downward pressure on prices.
Romney fails to even address these common sense measures in his energy plan. He has said he is in favor of eliminating fuel efficiency standards. The end result is that Americans will pay more to drive less miles under a Romney presidency.
9) Increasing American energy independence
As this infographic illustrates, in recent years, North American energy independence has become an achievable goal for America, regardless of whether we elect Romney or not.
If Romney was right about Obama wasting $90 billion on alternative energy companies like Solyndra and political cronies, then I could have forgiven his poor assumptions that our energy picture is sunnier than reality. The truth is that Solyndra raised over a billion dollars from private investors – twice the amount the U.S. government invested. Furthermore, the claims of political cronyism in the distribution of stimulus funds have repeatedly shown to be false. Out of the 33 large companies that received 34.5 billion in Department of Energy Loans, only four companies went out of business. This success rate of 88% is better than Bain Capital’s success rate of 78% when Romney led the company, and 22% of companies filed for bankruptcy within eight years.
From an economist’s perspective, I do think that President Romney’s energy policy would create more jobs than President Obama’s energy policies in the short term. In the long term, a Romney presidency will do probably do more harm than good by burning up our remaining inheritance of cheap energy sources, without investing in developing alternatives to our finite endowment of oil, coal and natural gas.
Despite great advances in technology, our proven reserves of oil and gas continue a general trend of decline.