Does energy independence matter?

ShellMartinez-refiAre there more Arab countries among the top ten oil producers or North American countries? This is a trick question, of course, to which there is no correct answer, since there are three of each: Saudi Arabia (2nd), Iraq (7th) and the United Arab Emirates (8th) on the one hand and the US (3rd) Canada (6th) and Mexico (10th) on the other. Of course, the Arab states in the top ten are all very significant oil exporters with low populations and small domestic markets. The US – like Russia, presently the world’s top producer – has a very substantial domestic market, roughly in balance with production.

As the ability to extract oil from difficult environments, such as deep water, from below fragile eco-systems and from reserves in shale deposits has increased, Middle Eastern countries have lost their power in global markets. OPEC countries were overtaken by non-OPEC producers over 30 years ago, less than a decade after the Arab oil embargo against the US.

This greater diversity in sources of supply helps stabilize global prices. When most production was in a small number of neighboring countries the market was vulnerable to a common disruption factor: a war in the Middle East, for example.

Production in the US and Canada is likely to expand over the next few years. Mexico, which nationalized its oil industry in the 1930s, has finally freed it up to foreign investment. This will enable the country to greatly expand its production too.

Will any of this affect American gasoline prices? Hardly at all. Oil is fairly cheap to move around, so the location of production has almost no impact on price. You will pay the same for your gasoline whether the oil is from Texas or the Persian Gulf. It might help protect American consumers against massive temporary disruptions to supply. On the whole, it will make far more difference to governments than to consumers. The federal government will earn more tax revenues but consumer prices will be unaffected.

Gas – that is natural gas rather than gasoline – is entirely different. Prices are determined locally and regionally. New producers within the domestic market will dramatically affect domestic prices. Canada and the US both have enormous reserves, and hydraulic fracturing makes these reserves economically accessible. This is likely to bring prices down, and we may see wider uses for gas. For example, vehicles powered by liquefied natural gas may become more popular.

Fossil fuels have so far defied all predictions that they are about to run out. As Sheikh Yamani put it, the stone age did not end because we ran out of stones and the oil age will not end because we run out of oil. But fossil fuels will be sidelined. Not by massive federal boondoggles such as ethanol, which arises from the fact that Iowa gets first crack at electing the President, not from any rational approach to energy, but by the government getting out of the way.

The Department of Energy lost $500 million betting on the solar company, Solyndra. Like other ‘alternative’ technologies, solar is especially attractive to politicians. Better to have their technologies assessed by hard-nosed investment specialists. Despite the failure of Solyndra, solar may well be the power that wipes out oil. Solyndra was claiming 12% efficiency. It is easy to see that a major technological breakthrough could transform the industry.

Quentin Langley is a Senior Lecturer in Marketing at the University of Bedfordshire Business School as well as a freelance columnist published in the UK and all parts of the US. He blogs on social media and crisis communications at brandjacknews.com

 

 

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