High expectations in the energy market predicted for the United States

The war in Iraq was said to be all about oil, oil, oil. Many were certain that the United States’ dependency on the product would never cease. Although the country’s reliance on the commodity is not predicted to completely dissipate, the International Energy Agency (IEA) has recently announced good news for Americans. The IEA’s chief economist said at a news conference in London on Nov. 12 that the United States can expect to become the world’s largest oil producer over the next five years. In accordance with the previous declaration, the IEA also stated that the U.S. will become a net oil exporter by the time the year 2030 rolls around, resulting in the country becoming self-sufficient in energy five years later. Does this seem too good to be true? There are lingering skepticisms from each end of the spectrum, but if the Paris-based organization is correct, then our nation’s populace should be prepared for a global shift in geopolitical strategies and trade, two possibly lucrative facets that should see full support.

For all the geology majors out there, you may be keen on knowing that the recent predictions by the IEA are a result of oil companies’ new horizontal-drilling technology, which can breach the shale deposits that are mainly scattered throughout the middle of the country. The correlation between unlocking the shale gas resources and the United States’ prospective production increase led to the IEA’s projections, since oil imports are believed to see a continued decline. The decreasing importation of oil is a sign that the United States is becoming less dependent on other countries, and although this is an advantageous transition, many experts are doubtful of there being great domestic benefits.

The reasons for doubt come from the speculation that a higher cost of shale extraction could be incurred over time. Gail Tverberg of “Business Insider” tackled this issue when he took into account the problem of diminishing returns. As easy-to-extract oil becomes less and less available, the exhaustion of oil reservoirs leads to extraction from more difficult sources, where the cost of removal rises. This means that although an initially cheaper trend will be seen, there may be an unexpectedly high cost later on. But we do have many years, and these are all just initial worries. Plus, as the impending switch looms over us, it is important to understand the primary benefits of energy production.

People will have expectations of lower gas prices and energy efficiency in homes, but it is important to realize the correlation of larger oil production and its benefits. For one, the price of gasoline will presumably stay in the same range, but the United States will still have lower costs in comparison to the rest of the world. When it comes to lower costs in the home, senior fellow for energy and environment at the Council on Foreign Relations, Michael A. Levi, said that these expectations (i.e. cheaper energy costs for appliances and improved gas mileage in cars) are unlikely due to the fact that these are all supply and demand-based. One positive result, Dr. Birol notes, is that power plants would be able to utilize the cheaper natural gas from the shale deposits and ultimately shed costs. So the benefits will be seen in America’s industries, rather than in terms of the individualistic aspects, where the domestic remunerations will go overlooked. However, the payback will be seen abroad.

The geopolitical ramifications can have a significant effect on relations with the Middle East, and this is the reason that the foreseen rise of U.S. oil production is a positive prediction. The United States will soon have lessened strategic interests with the capricious oil-producing regions that could span many years. The need for international interference in this area will no longer carry a burden on the shoulders of the federal government as long as there is a rise in energy production in the United States. The IEA mentions that up until 2035 the United States will become “all but self-sufficient” in terms of net oil production. The Organization of the Petroleum Exporting Countries (OPEC), which includes Iran, Iraq and Saudi Arabia, among others, will still maintain 50 percent of global production by 2035 as outlined in the IEA’s World Energy Outlook. This raises an extremely pertinent question: is there a possibility of the United States joining OPEC? A keg can only be tapped once, and the shale reserves will supply the nation with trillions of barrels of oil, but this is no infinite surplus. Although imports will see a reduction, this will not account for every barrel and no consumer is independent of an international market. These are the reasons that a strong relationship with OPEC is a viable option in consideration of our future energy supply and a leg-up on share of the market.

The oil production market will see a radical change over a long period of time as the United States begins pumping millions of barrels of oil a day. Relationships with countries, especially in the Middle East, will change. Trade will be largely speculated when the U.S. begins seeing a rise in oil exports. Reuters addressed analysts’ inquiries on the topic of major trade routes, especially the Strait of Hormuz. This shipping highway, located between the Gulf of Oman and the Persian Gulf, is a place that had before seen a flood of about 17 million barrels of oil a day in 2011. An energy-independent United States (a loosely-used term) would have to the weigh the pros and cons of continuing to safeguard these trade routes as they join the global market. The Straits of Hormuz are predominantly used to ship oil to Asian markets, including Japan, India, and China, and a lack of U.S. presence would leave the territory in Iranian control, a fear the United States has had since tensions increased in 2008. The United States completely evacuating the area is implausible, and a reckless decision since the need for foreign oil could likely become a concern once again. The United States should maintain a presence, but a minimal one. Relations with the Middle East will be fragile as the Unites States begins showing a stronger presence in the trade market that is largely influenced by Saudi Arabia and other OPEC members.

How will the United States thus handle their prospects after the IEA determined that the U.S. increase in oil production would hasten a global switch in trade? The main forecast by IEA chief economist Dr. Birol is that the Middle East will create hegemony in the Asian energy market where the consuming class is growing rapidly. The assumption is that the U.S. will set their sights on North and South America. An attempt to compete with Russia in the European market is another possibility for future trade, but has not yet been addressed.

I do not see these predictions as an utterly negative feature; most people see this as a positive expectation for the United States in terms of growth and our economic well-being. The only downside is overestimating the possibility for energy independence, which may backfire in terms of cost. The upsides are mostly seen in the foreign world anyhow, with increased trade, bettering relationships, and creating a reliable ally for energy industrialization. There seem to hardly be any downsides since the U.S. could use a top-dog rating during this time of a feared drop-off from the “fiscal cliff.”

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