Is energy independence all it’s cracked up to be?

If oil and gas are dirt-cheap, suddenly as abundant as hamburgers, or both, is it time to ring out the Hallelujah Chorus? Even if you are a climate change skeptic, the answer is no, according to two interesting reports this week.

A growing number of analysts and writers are joining a parade celebrating what they believe is an imminent age of U.S. self-sufficiency in the production of oil and gas. This blog has raised questions about the lack of data behind these projections, while analyzing the considerable geopolitical disruption to come should they be correct.

This week’s addition to the discussion comes from Michael Levi, who watches energy for the Council on Foreign Relations, and the Energy Security Leadership Council, a group of retired U.S. senior military officers and current and retired corporate executives. Neither challenges the underlying assumption of a new era of fossil fuels, but instead take aim at those shouting kumbaya.

On his blog, Levi asserts that forecasts of a new industrial age, ignited by cheap natural gas, and of the near-elimination of U.S. vulnerability to energy-borne instability are "detached from basic economic and geopolitical reality."

Levi quotes Robin West, the head of PFC Energy, from a Washington Post piece. West said: "This is the energy equivalent of the Berlin Wall coming down. Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now. The geopolitical implications of this change are striking: We will no longer rely on the Middle East, or compete with such nations as China or India for resources."

In 1973, the U.S. relied on imports for 15 percent of its oil and gas, Levi notes. Boom enthusiasts say that U.S. imports will fall from the current 45 percent of consumption, to 22 percent of the total. Which makes him ponder: "If 1973 ushered in a new age of energy insecurity, it is tough to see how a fall in imports to a level still higher than the 1973 one would reverse that."

Update: After the Jump, West responds to Levi.

Levi also challenges an assertion, made most prominently by Citigroup’s Ed Morse, that cheap natural gas prices will lead to a gigantic U.S. manufacturing and industrial revival. Manufacturers spend just 2 percent of total sales on energy, says Levi. Any benefit from lower gas prices will be only at the margins of the chemical, steel, cement and paper-making industries, he argues.

What raises the most concern from Levi and the retired generals and executives of the Energy Security Leadership Council, however, is a corollary advanced by the energy abundance wing — that now the U.S. can consider pulling back its military footprint abroad, the billions and billions spent on naval fleets to secure the Persian Gulf and Asian sea lanes(pictured above, USS Chaffee off Tien Sa port in the Vietnamese city of Danang last month). If they think it will no longer be a primary U.S. interest to protect global seaborne commerce, U.S. policymakers could be led to some wacky decisions. Levi:

People who otherwise would have worried about protecting communities and the environment can become oddly eager to dig up a few mountains or drill through a dozen national parks when someone tells them that another million barrels a day of oil production will fundamentally change the U.S. position in the world.

In their own report this week, the generals and executives, such as retired Marine Gen. P.X. Kelley and Fred Smith, the CEO of Fed-Ex, argue that the entire debate is out of whack — that the very concept of seeking security through the reduction or elimination of oil imports is "a goal that is fundamentally misguided."

The U.S. will benefit from a reduction in import payments — its balance of trade will be vastly improved, they say. But that does not add up to a less vulnerable nation. Say the generals and executives:

Changes in oil supply or demand anywhere tend to affect prices everywhere. The impact on the United States — or any other consuming country — is a function of the amount of oil consumed and is not related to the amount of oil imported.

Rather, the U.S. must still "get off of oil,"as the slogan goes, the report concludes. The ups and downs of global oil prices have a severe impact on the U.S. economy, and will continue to do so, whether or not the U.S. imports even a teaspoon of oil. At the leading edge, U.S. vehicles need to be weaned off of fossil fuels. Their report:

Over the long term, the United States can achieve meaningful energy security by transitioning away from liquid fuels in the transportation sector. Vehicles that derive motive power from grid-generated electricity stored in onboard batteries are entering the market today and over time could represent a key pillar in a more secure transportation sector and economy. Plug-in electric vehicles are particularly promising in light-duty applications, which account for roughly 40 percent of U.S. oil demand.

As suggested above, there is reason for skepticism regarding the foundation of the oil-abundance narrative. However, even if its proponents do possess the numbers to validate their forecasts, the irrational exuberance extends to the benefits of independence.

Robin West responds: 

Steve, obviously Mr. Levi did not contact me for my views. Some of his observations are quite obvious.  David Ignatius took a small sound bite from a longer conversation. I believe that the North American transformation is huge — I still stick to the Berlin Wall analogy. I do not subscribe to the concept of Energy Independence, but I do subscribe to the concept of energy security — reliable supply at reasonable cost. Reliability of supply will be largely dealt with by the North American (U.S. and Canadian) oil surge.  I do not need Mr. Levi to remind me that oil is a fungible commodity whose price is set globally. But if the price rises, foreign exchange is preserved and domestic economic activity will boom. Of course the rest of the world economy will rely on oil, largely from the Middle East, and the U.S. is a critical beneficiary/player in the world economy. Did I say that the U.S. should abandon its responsibilities? I do not recall that I did, ever. As to natural gas, the fallacy of the argument is that prices are so low that they are trivial except for a few industries. This is true, because U.S. prices are so low. An examination of the data would show the fiasco for the consumer of the European utility sector versus the U.S. Why doesn’t Mr. Levi compare the two? The decisions of the European Green movement will help strangle economic growth in Europe.

As to the solution of get off oil, an admirable goal, most of the solutions proposed have proven to be somewhat disappointing to date in spite of substantial investment. I am unaware of any observations by Mr. Levi on the abysmal failure of the Administration to hit their 2015 target on electric cars. Would he be kind enough to share the formula for cellulosic ethanol which is scalable and commercial? Glib statements on electric cars ignore the challenges and massive failures to date.

In some of my speeches, I have pointed out that I believe Fed-Ex is probably the most innovative player, public or private, in the field, and should be encouraged. They are examining everything. As I understand it, their rigor is based on technology and economics, not politics and emotion. That is what is needed.

As with the Berlin Wall coming down, one should not assume the “end of energy history.” The U.S. is not completely out of the woods, but we are much better off than we were before, and we are certainly better off than most of the rest of the world. There are still energy challenges which will impact the global economy and the U.S.