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Coming Soon to America: Energy Independence

Energy Independence

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“Given America’s huge appetite for fuel, energy independence has always seemed more of a dream that a realistic prospect. Yet, energy independence is starting to loom in sight…. If these trends continue, the U.S. will be able to supply all its own energy needs by 2030 and be able to export oil by 2035,” says Michael A. Levi, CFR senior fellow and director of the program on energy security and climate change and author of The Power Surge: Energy Opportunity, and the Battle for America’s Future. 

Since the early 70’s, America’s stated goal has been to become energy independent. Now, according to both the US Energy Information Administration (EIA) and the International Energy Agency (IEA), “if current production trends continue, the U.S. will overtake Saudi Arabia and Russia as the world’s largest oil producer in 2017.”

Why this sudden turn-around? America’s coming energy independence is the result of a number of factors from surging oil and gas production, technological advancements, a growing renewable energy industry, and falling oil consumption.

Crude oil production has been on the rise for the past four years. In 2012, U.S. crude oil production posted its largest one-year increase ever, exceeding imports for the first time in 16 years. Last year, the U.S. imported only 40% of the oil it consumed, down from 60% in 2005.  By next year, according to the US Energy Information Administration, the U.S. will need to import only 30% of its oil.

In addition, America is converting more natural gas and coal into liquid fuels for trucks and railroads than ever before. In 2011, natural gas surpassed coal as the US’s biggest source of domestically produced energy. Only a short time ago, LNG (Liquid Natural Gas) terminals were being built to import natural gas. Now, new facilities are being constructed to liquefy and export LNG. In addition, the US is building more pipelines and liquids terminals to more effectively transport raw material, process it and ship it to end users, both domestically and abroad.  

In addition, Americans are using less gasoline. Total oil consumption peaked at 20.7 million barrels per day in 2004. Since 2005, America’s total oil consumption has been dropping steadily, falling by nearly 10%, reversing what previously had seemed to be an inexorable upward trend. Americans have changed their driving habits and are driving considerably less. Plus, they are driving more efficient vehicles. Technology has made it possible to build more efficient vehicles with higher fuel economy standards and better batteries. 

While there are still a lot of complaints about the price of gas, higher gas prices have a beneficial side. Sustained oil prices have made it economically viable to exploit harder-to-reach deposits. Technology and techniques pioneered over the last decade – with U.S. government support - have made it possible to extract shale oil more efficiently. Gas and oil wells are now producing twice as much as was expected.

Then there’s the discovery of cheaper oil sources in Alaska, the Dakotas, Ohio, Pennsylvania and Texas, which are having a major impact on energy production. And, there appears to be approximately 50% more undiscovered crude oil in the U.S. than was originally believed.

Canadians have long known about the possibility of upgrading the Bitumen found in Western Canada to crude. Improvements in technology as well as the relative high level of world oil prices have turned this into a thriving industry. Canadian crude is shipped not only to the U.S., but to pipelines to Canada’s western border for shipment to the Far East.

Fracking in particular has led to optimism about the future of natural gas. Although the extraction of the gas has led to significant debate, there is no doubt that its mere discovery is having a huge effect on America’s energy landscape.

America has also had success with biomass-based fuels and zero-carbon energy sources such as wind, solar and geothermal, which have doubled since 2008. Most experts say that renewables won’t ever be the US’s main source of energy, but renewables will play a role in America’s future energy independence.

Consequences: intended and unintended

There are potentially huge economic and political consequences to America’s possible energy independence. The most obvious may be the impact on current trade imbalances. Exporting LNG to the Far East, where gas prices are three times domestic prices is a real possibility. On the downside, exporting gas may lead to higher prices domestically, which could increase feedstock pricing for domestic chemical companies and increase fuel costs for power generation companies.

Political issues will also be far reaching- -from re-writing domestic energy policies, to regulations on the exploration and production of shale oil, as well as tax treatments for these products to America’s foreign policies with all trading countries both allies and non-allies.

Insurance implications

These changes in the energy landscape will provide challenges and opportunities for businesses involved in infrastructure projects, exploration and production, and construction of industrial facilities taking advantage of lower feedstock costs such as petrochemical, gas processing and refining.

Large construction projects such as pipelines and LNG terminals are complex and cost more to build. They need new, longer- term insurance policies of five years or more. There is also an increased need for balance sheet protection for exploration and production operations. In addition, these operations also have significant business interruption, environmental and extensive liability exposures. Even exposure to mobile equipment fleets and marine risks will be increased.

A big challenge is refining and distributing the inexpensive fuel from oil and gas projects in Texas, Wyoming, Ohio, the Gulf States, the East Coast and the West Coast. Major infrastructure projects will be necessary to transport oil and gas to consumers, either via pipelines or railroads.  The Keystone XL Pipeline is awaiting Presidential approval and would be a major project impacting many states. In addition, the U.S. has already begun constructing new LNG terminals, refineries, and petrochemical plants.

The other big challenge to insurers and those in the energy sector is exploration and production. Gas exploration – fracking – is taking off. Technology has made it possible to release the natural gas in shale.   States like North Dakota, Oklahoma and Texas are seeing a surge in production thanks to fracking although concerns about potential risks associated with fracking – i.e., water supply pollution, increased earthquakes, environmental pollution and more -- threaten to halt or delay some projects.

The US gained its independence once in history.  Will it grow even more independent in its future?  Many are working very hard to see that the country is more energy self-sufficient.  Managing the complex risks associated with energy exploration, development and operations will be crucial to our success in achieving energy independence.    

 

Bob Finelli, XL Group’s Energy Underwriting Manager, has more than 25 years of experience in property and energy insurance. He is involved in every part of XL Group’s energy business, focusing on developing not just the underwriting tools and platforms, but the relationships needed to serve clients and brokers.

bob.finelli@xlgroup.com

 

Notes:
(1)   Council on Foreign Relations, “Is this What Energy Independence Looks Like?” by Michael Levi, April 17, 2013
(2)   Business Insider, “10 Reasons Why America Will Continue to Dominate the Global Economy for Years”, by Steven Perlberg, June 22, 2013.
(3)   Council on Foreign Relations, “America’s Energy Opportunity”, by Michael Levi, May/June 2013

For More Reading:
The Power Surge: Energy, Opportunity and the Battle for America’s Future by Michael Levi, published May 2013

 

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