Fracking and Oil Boom Will Reshape American Energy Policy

While American politicians often make it seem like the U.S. is in the midst of an energy crisis, a different picture is being offered by energy industry executives: one where the U.S. finally becomes energy self-sufficient as the world enters into a new Golden Age of Hydrocarbons.

ConocoPhillips CEO Ryan Lance added his voice to the chorus last week when he announced to a meeting of OPEC officials that the United States could become self-sufficient in crude oil and natural gas production by the middle of the next decade. Influential industry analyst Ed Morse of Citibank recently made his own similar projection, while the former president of Shell Oil, John Hofmeister, has put forward his plan to ween the U.S. off Mideast oil and make the country almost entirely self-sufficient by 2020.

Their rosy projections stand in stark contrast to the proclamations of politicians, like Republican presidential candidate Mitt Romney, who accuse President Barack Obama of plunging America into an energy crisis, and to the projections pushed by Peak Oil theorists that the world is on the verge of a calamity caused by the rapid depletion of the world's remaining oil reserves. Peak Oil theory has its roots in the 1970s and essentially maps oil production to the familiar bell graph: once oil supplies have passed the apex of the curve, there's nowhere to go but down.

In one sense you can't argue against the Peak Oil concept: oil is a finite resource, so at some point there will indeed be a production “peak.” The problem is that the downward slope is not nearly as linear as Peak Oil theorists would like us to believe it is. Peak Oil overlooks some basic economics: for example, if oil is selling at $30/barrel, it makes no economic sense to develop an oil field where your production costs will be $40/barrel since you'll lose money on every drop of oil you produce; but if oil starts selling at $80/barrel, suddenly developing this field makes a lot more sense. Add to that technologies like horizontal drilling and hydrofracking and suddenly a lot of previously dismissed oil and gas fields become valuable reserves. This is why author Daniel Yergin notes that global oil supplies have increased three-fold since the Peak Oil theory was first proposed in the 70s.

A prime example of these technologies at work is the Bakken reserve, which underlies most of North Dakota and stretches into Montana and up into Canada. Petroleum geologists knew of the Bakken for decades, but the oil held in thin layers of impermeable shale severely limited production from this region since a traditional vertical oil well drilled would, typically, quickly run dry. The ability to drill horizontally through the thin layers of the Bakken and increase the permeability of the rock with hydrofracking turned this largely overlooked land into a center for petroleum production and transformed places like sleepy Williston, North Dakota, into oil boom towns. Hydrofracking operations from Pennsylvania to Texas have resulted in a glut of natural gas and driven commodity prices down to levels not seen in a decade (though not without environmental concerns, which deserve an essay of their own).     

Crude oil and natural gas production in the United States is experiencing a surge that was totally unexpected just 10 years ago. Growing domestic energy reserves will impact not only the economy but our foreign relations as well.  The construction of liquefied natural gas export terminals — and if the American Petroleum Institute has their way, a relaxing of the ban on U.S. oil exports — could turn the U.S. into an energy exporting nation. Meanwhile lower, or possibly no, demand for oil from the Persian Gulf should prompt a fundamental rethink of U.S. involvement in a region of the world that has dominated American foreign policy since the end of the Cold War in 1991; why should the U.S. dedicate so many resources to defending this energy-rich part of the world if the U.S. has no need for its energy resources? It is about time that our politicians began to adapt to this brave new world of energy.