World Economic Roundtable

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Harnessing America’s Energy Future

Published:  April 6, 2011
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While U.S. companies are among the world’s leader in energy-efficiency technology and in oil and gas services, the United States has yet to put these technological advantages to full use domestically.  Indeed, one of the glaring weaknesses of the U.S. economy is its vulnerability to high energy prices and its relative low energy efficiency, which during times of high oil prices raises the cost of doing business, cuts into discretionary consumer spending, and increases the trade deficit.  According to a study by IHS Global Insight, every 25 cents of a gallon increase in the price of gasoline—which is equivalent to a $10.70 a barrel increase in crude oil—results in a decline of .25 in annual GDP and the loss of 270,000 jobs.  In 2010, crude oil imports accounted for more than $250 billion of America’s trade deficit—or nearly 2 percent of GDP.  With the recent surge in oil prices, that number is likely to rise significantly in 2011.  Reducing the American trade deficit in oil by half would therefore add almost 1 percent to GDP.

In a speech in late March, President Obama laid out an agenda for greater exploration of natural gas and development of other domestic sources of energy, but there is no indication that the administration has divorced itself from the narrowly focused clean energy agenda that has been a centerpiece of their economic competitiveness program.  But, the administration’s clean energy program aimed at promoting solar and wind may actually be a drag on economic growth for the near and medium term.  This is so because the program subsidizes the commercialization of inefficient wind and solar technologies, many of which are produced abroad, while ignoring more efficient alternatives that would cut America’s oil import bill and reduce the overall cost of energy in the United States.  It makes no economic sense, for example, to subsidize the installation of imported wind turbines when natural gas fired generators can produce an equivalent amount of energy for one-third to one-half the cost.  Thus, the administration’s program may actually subtract from economic growth over the next 5 to 10 years.

The United States, of course, should invest heavily in research and development into new clean technologies with the goal of bringing about an energy revolution.  But in the short to medium term, it does not need to have an energy revolution to make energy development a new source of economic growth for the economy.  A mini-revolution will do, and that is exactly what the United States has enjoyed in the last few years.  Because of new technological advancements in oil and gas extraction, and because of new large oil and gas shale discoveries, the United States has dramatically increased both its natural gas production and its recoverable reserves.  The most recent estimates suggest that the United States has the natural-gas equivalent of more than 350 billion barrels of oil—roughly as much as the proven oil reserves of Saudi Arabia and Venezuela combined.  And because of the increased production and glut of supply, natural gas prices have fallen to less than $4 per million Btu, from an average of nearly $7 per million Btu in the four years between 2005 and 2008.  Wind and solar in the United States become competitive when natural gas is closer to $9 per million Btu.

What the United States does not have is a strategy to take advantage of its huge cornucopia of natural gas.  Natural gas has the advantage of both being able to lower the cost of energy and reduce significantly carbon emissions.  And it can be used directly for both electricity generation and transportation.  While there are some environmental concerns about the effect of some extraction techniques on drinking water, these problems have been shown to be manageable with proper regulation and oversight.  It is estimated that the United States could over a ten-year period cut in half its importation of OPEC oil by converting its heavy transportation fleet of trucks and buses to natural gas.  The other advantage of developing America’s natural gas resources is that it would create jobs and manufacturing in the United States since much of the equipment used to extract and transport natural gas is made in the United States by American companies.  It is also possible that the United States will become a major exporter of liquid natural gas over the next decade given the price differential that exists between domestic gas and that produced abroad.

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