A nice sounding slogan and empty policy goal.
A reporter recently called me and asked me what I thought of the term “energy dominance”, which had been recently introduced by President Trump and his cabinet. I had never heard it before. Rick Perry, Secretary of Energy, explained it as follows:
“An energy dominant America means self-reliant. It means a secure nation, free from the geopolitical turmoil of other nations who seek to use energy as an economic weapon.”
“An energy dominant America will export to markets around the world, increasing our global leadership and our influence.”
Now the first part is not new. It’s what we have in the past called “energy security or independence”. This is Economics 101. Oil, which is really what we are talking about here, is traded in a global market. We have historically been extremely dependent on imports from abroad. If countries we have political disagreements with have market power in the global market for oil, they can raise the oil price and after a while make it really expensive to drive that Scout International of yours around Abilene. We have tried to address this vulnerability in several ways. The two big ones are a strategic petroleum reserve (which has been shown to be pretty much ineffective and the greater search for domestic or at least North American supplies. The latter are coming online increasingly rapidly via frac(k)ing and tar, excuse me, oil sands from Alberta. Tar sands are somewhat expensive to convert (yet not as expensive as people thought a year ago), so this is only feasible when oil prices are relatively high. But again, nothing new here. It is important to keep in mind that when evaluating the energy security and economic benefits of new domestic energy sources we should evaluate these based on their full costs (extraction, transport, processing and life cycle external/pollution costs).
And here is where the second part of energy dominance comes in. What I think I am reading here is that Secretary Perry would like us to become the big dog in global energy markets. In economics being the big dog means that you can single handedly affect prices of an energy source globally. This turns out to be incredibly hard to do. Ask OPEC. You need a few things to be true. First, you need to control a significant share of the global market in a commodity. Second, you need to be able to effectively control price, which is usually done by reducing output or flooding markets, depending on which way you want price to go.
So let’s look at the three main sources of energy. It is true that gross crude oil and petroleum exports have been growing like gangbusters since 2010 – from 2 to 6 million barrels per day. Of course, crude oil exports were illegal in 2010, though there was a little export of slightly refined product. But before we get drunk on these growth rates, let’s soberly remember that this does not change the fact that the US is still a net importer for these commodities. Total global demand is roughly 96 million barrels per day, so US exports account for roughly 6% of global demand.
How about coal? US coal net exports were about 50 million short tons last year. Global production is somewhere just north of 9 billion short tons. That makes US exports roughly 0.56% of the global total. How about everyone’s favorite bridge fuel to a cleaner future – natural gas? In 2014 we exported 2.3 trillion cubic feet of gas abroad. You can send that cheap frac(k)ed gas to Mexico and Canada via pipeline. Yet the thing about gas is that in order to ship it across the seven seas, you need to compress (liquefy) it. Liquid Natural Gas sold beyond NAFTA boundaries accounted for 186 billion cubic feet. Total world production is somewhere near 125 trillion cubic feet. This is 0.15% of the world total, so we are definitely not the big dog here.
So what is Max talking about? In order to affect global prices, you can’t just call out a new price and assume that everyone else is going to do what you say. Especially if you are not the biggest kid on the playground. You need to be able to meaningfully affect quantity supplied. That again requires two key ingredients:
- You need to be able to control supply. Even if the government owns supplies (Saudi Arabia), this is still challenging. If you want higher prices, you need to be able to withhold quantities. If you want lower prices you need to be able to flood the market. But in the US there is no emperor that dictates supply! It’s a (relatively) free economy, where firms will sell to the highest bidder. If you want to stop them from doing that you would have to federalize these companies (good luck with that) or limit/incentivize exports. This is possible, but the only way to do that meaningfully is to tax (ahem…) or subsidize (ahem… 2.0).
- The other key ingredient is that in order to move global prices you need to control a significant enough share of the global market. Which we do not for any of these commodities. And even if you manage to work your way into supplying a significant share of the market, if you start playing pricing games, the pesky problem is that other producers tend to offset whatever change you make.
Unless something is really wrong with my understanding of global energy markets, the United States does not have either of these two key ingredients. Even over the duration of a possible two term Trump presidency. For Blockbuster Video, excuse me, coal one would need to build massive export capacity on the West Coast, since let’s face it, if there is a significant market for low sulfur coal, it’s in Asia. West Coast states are fighting these terminals tooth and nail. The one in Oakland looks like it’s dead and similar proposals up the coast are facing big legal battles of local communities against well paid lawyers dressed up in Brioni suits. LNG faces a similar battle. Asia and Europe are the key markets here. Building new LNG terminals on the West Coast has been extremely challenging as there is significant community resistance – largely due to the perceived risks of such a facility in your neighborhood. That leaves oil. We have significant export capacity and production is increasing. Yet the fact that OPEC is home to 80 percent of global reserves, which is multiple of even the more optimistic estimates of US reserves, will make it hard for the US to significantly influence prices in this market.
So where does this leave us? I think there is room for some strategic targeted energy alliances, which are in our political interest. Helping Europe decrease its dependence on Russian gas would likely be welcomed. Providing Japan with a reliable lower cost source of natural gas would probably also be a positive development.
But if I were to write a white paper on energy dominance, it would have few fossils in it. It would largely focus on helping US companies and universities to develop the renewable energy technologies of the future, which can then literally take over the world. The smartest way to decrease the global economic power of, say, OPEC is to make their technology obsolete.
I am not going to crack a pathetic #MAGA joke, but let’s!
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.