Does the US still need the Middle East?
Adam Jourdan Feb 03, 2012
What’s the news?
By exploiting its vast reserves of shale gas (as well as other alternative fuels, such as biofuels, unconventional oils, and increased energy efficiency), America could be almost entirely energy self-sufficient by 2030, reducing its reliance on foreign imports.
That’s according to BP’s Energy Outlook 2030 report. It’s not the first time such a prediction has been made. In October 2011, The Daily Telegraph declared that “within five years or so, the US will be well on its way to self-sufficiency in fuel and energy”. The same month, The New York Times reported that America “may now have the means to reduce its half-century of dependence on the Middle East”.
Is US self-sufficiency possible?
The short answer is: perhaps – in theory at least. The focus for increasing domestic energy production is on shale gas. New developments in hydraulic fracturing or ‘fracking’ have opened up vast new fields of natural gas. Indeed, America already produces more gas than it consumes, having overtaken Russia as the world’s biggest gas producer in 2009.
The area the US would really need to address is crude oil imports. America imported around nine million barrels per day (bpd) in 2011, and produced around 5.7 million bpd, leaving a significant gap to fill. Unconventional oil and biofuels are two potential areas of growth.
Domestic oil production rose by 114,000 bpd in 2010 and the government is pushing biofuel development (see below). Shale oil may also take off in the wake of its gas sibling – Bloomberg cites production estimates of three million bpd by 2025 (five times current production levels).
What are the obstacles?
Critics argue that shale gas and oil are slow and difficult to get out of the ground. Energy sector analyst Gregor Macdonald notes that “a technique such as this, although replicable and repeatable, will not change the fact that newer, unconventional resources are developed and produce oil at a much slower rate”.
At the North American Energy Resources Summit in January, Labyrinth Consulting’s Arthur Berman argued that bullish support of shale gas was based on the misconception that “we can produce more oil and gas from shale than was produced from better reservoirs over the past century”.
There are also concerns that fracking is damaging to the environment. In France there is a moratorium on the practice, and experts are increasingly certain that shale gas is responsible for a spate of minor earthquakes in the US and UK, according to MIT’s Technology Review. John Kemp at Reuters adds that even if it works, there simply isn’t enough shale oil in the US “to eliminate the requirement for imports anytime soon”.
What’s the likely outcome?
Oil is one of the main reasons talk of self-sufficiency seems premature. While huge shale gas reserves could help make the US a net gas exporter (and even give it a “surplus” on the energy balance sheet), this supply won’t be able to replace oil like-for-like. Biofuels could, but need to be made more competitive price-wise.
Total self-sufficiency wouldn’t make sense for the US anyway. It’s not in a country’s interest to exclude itself from the global energy markets. Why drain dry your own supplies when you can buy abroad, keeping spare reserves at home for an even rainier day?
Yet the rhetoric of oil independence is attractive politically, and the US will no doubt want to produce more of its own oil and gas domestically to reduce exposure to energy threats from a volatile Middle East. But it’s unlikely to sever ties with importers completely.
What could this mean for investors?
As with any big change – and US energy independence would be massive for global energy markets – there would be winners and losers. Big crude exporters to America – namely Canada, Saudi Arabia and Mexico – would suffer. Saudi Arabia would be among the first to feel the pinch if the US cut back on oil imports, but it has a relatively broad market base (only around 15% of its crude exports went to the US in 2011), and growing demand in Asia would likely take up the slack.
More vulnerable is Canada, as the US accounts for 99% of its crude export trade. As for the winners, companies in the sector have already seen rapid growth, and this is likely just the beginning. Huge amounts of money are being pumped into shale gas – French giant Total is investing $2.32bn for a shale gas stake while Sinopec, China’s largest energy company, plans to invest $2.26bn. Chevron, BP, Royal Dutch Shell, Apache and others are also getting in on the act. Service providers – such as UK engineers Weir Group (LSE: WEIR) and Hunting (LSE: HTG) – are another exciting growth area.
American biofuel firms likely to profit
American biofuel developers are also in for a potential windfall. The US has set aggressive goals for moving biofuels into the marketplace, aiming to grow the annual supply of renewable transportation fuels to 857 million barrels by 2022, up from around 13 billion in 2010 (and only two billion in 2000).
Interesting firms that could ride the wave of biofuel growth include Solazyme (US: SZYM), whose technology turns sugars into high-value oils. Earlier this month, Maersk Kalmar completed testing a 6,500 nautical mile voyage with Solazyme’s 100% algal-derived advanced fuel.
Others to watch are California-based Amyris (US: AMRS), which works on high-performance alternatives to petroleum-sourced fuels and chemicals and has ties with Total, and renewable chemicals and advanced biofuels company Gevo (US: GEVO).
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.