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Energy Dominance

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:

  1. 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).
  2. 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 View All

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.

10 thoughts on “Energy Dominance Leave a comment

  1. Thoroughly disagree with your thoughts.
    Share doesn’t matter. What matters is breakeven price.
    Right now the US is the marginal producer of energy. The reason the price of oil has been hovering around $45-55 is that there is right around where US producers breakeven, so competitive pressures push the price there.
    This actually means the US could play a huge role in world market prices. Simple taxes raising the price of oil produced in the US would raise world wide prices.
    Now, could other entities jump in and try to drive the price up or down? Yes. But if they’re infra- or super-marginal, then they can’t shift price at all.
    Over the short run then, the US can absolutely affect worldwide prices. Over the medium run: call it 3-10 years, that won’t be true.

  2. Stephen Lord,

    I disagree with you assertion that sustainable development is central planning. Providing subsidies for renewable energy development that internalize the environmental costs of CO2 emissions is consistent with competition in that it makes competitive markets more efficient. The current 30 percent federal investment tax credit approximately performs that function today and makes large-scale solar PV and onshore wind (but not offshore wind, which is outrageously expensive) competitive with fossil fuel generation.

    Trump’s talk about competition is nothing more than a thoughtless knee-jerk reaction.

  3. Even OPEC has not been dominant. The 10-fold increase in oil prices during the 1970s is largely explainable as resulting from the Hotelling shocks of falling perceived reserves, rising backstop costs, and falling real interest rates. The effect of OPEC on market power was to end the monopsony of the “Seven Sisters,” the Shah of Iran and other leaders with truncated property rights, who had been artificially depressing the price of oil. But in the early 80s, the Hotelling forces reversed (especially interest rates) and OPEC couldn’t do much to stop prices from falling (“Oil Prices without OPEC: A Walk on the Supply-Side”).

  4. Your title says it all. You have a vested interest in sustainable development which is effectively central planning. What The President is talking about is competition. The thing about free markets is that they are innovative. Your points are very valid particularly the West Coast obstructionism but that could be dealt with by executive order under the Interstate Commerce Clause as the Western State would be preventing more inland states from exporting which is an obvious restraint of trade. The other obvious effect will be that imports to the US from Canada and Mexico will drop and they will be forced to export. Canada already has export facilities for coal and is trying to get more direct exports for oil from the West Coast. Mexico already has LNG export facilities owned by Sempra and locating other export facilities in Mexico are likely. The energy market is worldwide and notoriously susceptible to small changes in the balance of supply and demand as there is short term price insensitivity so we do not need to make a big change in supply to have a big impact. You also ignored the importance of Alaskan exports which are now permitted. Alaska is in a great position to supply our Asian allies Japan, S.Korean and Taiwan who would love alternate sources of supply that do not go through the South China sea and Alaska is not obstructionist. You also overlook the desperate need for money of the California State government and Jerry Brown has already floated the idea of overturning the offshore drilling ban.

  5. Very insightful. Dominance also implies a willingness of others to be dominated. But the others in the world want their own energy security and independence. As you suggest, we should instead strive for global leadership in scientific research and commercial development along the supply chains for modern energy infrastructure and services.

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