There is a common theme of surplus in US energy markets today with more natural gas, natural gas liquids (NGLs) and light sweet crude oil being produced than can be processed and consumed domestically. The likely destination of those surpluses is export markets – either directly or in the form of derivative products. How should we think about these exports in the context of “energy independence”? U.S. energy policy since the 1970s has been centered on the importance to national security of reducing dependence on foreign resources—the oft-touted, elusive goal of “energy independence.” Today we examine whether a btu energy balance is a practical and effective measure of energy independence.
One way to look at the energy independence issue is the same way we view US economic national security, where the closely watched statistic is the balance of payments. By that measure if we spend more on imports than we make back on exports there is a net outflow of money. But if we spend about the same amount of money on imports as we make on exports, we have a healthy trading relationship with the world. The same kind of logic could be applied to energy. The theme of today’s blog forms part of the analysis in RBN Energy’s latest Drill Down Report “The Future’s So Bright I’ve Gotta Wear Shades – Crude, NGLs and Natural Gas Outlook”. Drill Down Reports are part of RBN’s Backstage Pass subscription service (see the Ad below).
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What would be an equivalent view to the economic balance of payments in terms of energy? Well we import oil, natural gas and small volumes of NGLs and we export natural gas (to Canada and Mexico), NGLs, coal, refined products, and we are proposing to increase the exports of natural gas and potentially to increase the export of crude oil (beyond Canada). Thus, we have big flows of energy both in and out, which—if they were in balance—could be the energy equivalent of the balance of payments.
Of course, all these different energy commodities have their own units and molecular structures, so we need a way to measure them on an equivalent basis. Fortunately the Energy Information Administration (EIA) already does so. As we reviewed in a recent blog, the EIA evaluates national energy statistics including imports and exports in its Annual Energy Outlook (AEO) in the common unit called “Quads” or quadrillion Btu’s of energy content (see Big Numbers in Cowtown: Understanding Energy Market Mega-Numbers). In this way, a barrel of crude oil containing 5.8 million Btus can be measured against a thousand cubic feet Mcf of natural gas containing 1.03 milllion Btu—in other words, it takes between 5 and 6 Mcf of natural gas to balance one barrel of crude oil. Of course, as our blog on the topic pointed out, once the comparison starts being made at the “Quadrillion” level, the numbers quickly get too big to put your head around. But if all we’re trying to determine is whether the inflow equals the outflow, the size of the numbers doesn’t really matter.
EIA’s latest estimates are contained within the AEO2014 (Early Release). How close does it show the US to an import-export balance by year through 2020? As shown in Figure 1 below, the United States experiences a net inflow of energy (and thus outflow of dollars), as high as 18.5 Quads in 2011, the equivalent of just under 9 MMb/d of crude oil. But that deficit is shrinking quickly thanks to rapid growth in the production of US energy resources. EIA expects the deficit to come down to 11.2 Quads in 2014 and to one-third of the 2011 level, or 6.2 Quads by 2020—the equivalent of just under three MMb/d of crude oil.
Although that figure of 6.2 Quads is much lower than the U.S. has experienced in recent decades, it is not zero. However, as we noted in another recent blog series (see Golden Years: The Golden Age of U.S. Natural Gas) EIA has a long history of being very conservative in its recognition of the success of U.S. oil and natural gas development. Is that happening here, and is it plausible that by 2020 we could actually be in a net-zero position in our energy balance? In other words, is it reasonable to expect enough additional production of domestic natural gas and oil on top of EIA’s forecast to support either an increase in exports of 6.2 Quads or a similar-size decrease in imports (or some combination of the two factors) that could get the bottom line number to zero?