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March 4, 2015

Should the U.S. Invest in Domestic Production of Oil and Gas?

natural gas, domestic

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As I consider the question of whether or not the U.S. should increase domestic production of oil and gas, I hear the rallying cry of the Keystone (KXL) Pipeline and fracking advocates, “Energy independence! Jobs for Americans! A boost in the economy!”

To which my reply is, “How?

The idea of energy independence in America is akin to the idea of manufacturing independence from China.

Could we do it? Probably, but it would be unpleasant.

Think of it this way: would I want my iPad manufactured here in the US? No, because it’s going to cost me a small fortune. Would I like my oil drilled domestically? No, because the U.S. does not have a competitive advantage in oil production.

The U.S. is the third largest oil producer after Russia and Saudi Arabia. However, Saudi Arabia has the lowest production cost per barrel of any country. If you compare the average total upstream cost on a barrel of oil for the U.S., it’s $33.76 versus the Middle East’s average total upstream cost of $16.88. That’s roughly half the cost. It follows, economically, that I come to the conclusion that by producing oil domestically, we are at a competitive disadvantage.

This is not to say that it is unprofitable, just that other countries do it cheaper.

Advocates for the KXL pipeline and increased domestic production will tell you the domestic oil is still less expensive because of the taxes we heap on foreign oil. The flip side to this coin is that taxpayers support subsidies given to domestic oil production.

The money that consumer’s pay into the tax system to support subsidies on domestic oil is actually greater, per barrel, than the taxes on foreign oil.

From a purely economic standpoint, domestic oil is not in our best interest.

Projects to increase domestic oil production, like the KXL Pipeline and the extraction of oil from tar sands, also run the risk of environmental externalities. The plan for the KXL Pipeline runs across the largest freshwater aquifer in the U.S. and the mining of tar sands in Alberta would tear up a boreal forest, which is home to the endangered whooping crane.

Why would we inflict potential externalities on the environment with a production plan that isn’t economically efficient?

Natural gas production, however, is an area in which we have leveraged a competitive advantage by the use of horizontal drilling and hydraulic fracturing technology. This has been wonderful for the manufacturing industry. However, because manufacturing in the U.S. has become such a technologically efficient process, this boom has resulted in a more financially efficient process but not as many jobs as expected.

The question then becomes: What advantage does the American public receive from this leveraging of hydraulic fracturing technologies, if not jobs?

I would say they receive the advantage of competitively priced manufactured products.

Natural gas also provides another advantage, the more we rely on natural gas, the less we rely on coal.

Coal is widely considered the dirtiest energy form. When coal is burnt it releases coal ash and carbon dioxide into the atmosphere. This ash contains high levels of arsenic, chromium, selenium, and barium.

In contrast, the burning of natural gas, when done with proper ventilation, releases proportionately less carbon dioxide and water vapor. Relying on natural gas has allowed many places (my home state, Colorado, for example) to shutdown coal plants or convert them into natural gas plants and subsequently improve air quality.

So when considering the negative impacts of fracking, the alternative of poor air quality due to burning of coal, should also be considered. Natural gas has allowed many places to decrease carbon emission significantly.

As domestic oil is economically inefficient, it is my belief that we should not invest more into the production of domestic oil. In the case of natural gas, while it does not provide jobs, it does allow a decrease in carbon emissions and so should be pursued, as long as the environmental effects are evaluated before hydraulic fracturing takes place.

The U.S. should also leverage our competitive advantage in services, global brands, and technological innovation in order to create more efficient processes that don’t rely so heavily on oil and gas. If we can innovate technology that extracts more energy from the same amount of resources we will gain the competitive advantage in energy efficiency.

This strategy will likely be much more effective in creating energy independence in America, American jobs, and a boost in the American economy.

 

References:

Bazzi, Mohamad. “Saudi Arabia Is Playing Chicken with Its Oil.” Reuters. N.p., 15 Dec. 2014. Web. 02 Feb. 2015. Retrieved: http://blogs.reuters.com/great-debate/2014/12/15/saudi-arabia-is-playing-chicken-with-its-oil/

Drum, Kevin. “We Could Stop Importing Oil From the Middle East Today If We Wanted To.” Mother Jones. N.p., 29 June 2012. Web. 02 Feb. 2015. Retrieved: http://www.motherjones.com/kevin-drum/2012/06/big-oil-news-isnt-fracking-its-efficiency

“Fossil Fuel Subsidies: Overview – Oil Change International.” Oil Change International. N.p., n.d. Web. 02 Feb. 2015. Retrieved: http://priceofoil.org/fossil-fuel-subsidies/

Hoover, Kent. “Energy Boom Due to Fracking Boosts Manufacturers, but Where Are the Jobs?” The Business Journals. N.p., 5 Sept. 2013. Web. 02 Feb. 2015. Retrieved: http://www.bizjournals.com/bizjournals/washingtonbureau/2013/09/05/energy-boom-due-to-fracking-boosts.html?page=all

I’m Not Sure Who Oil Companies Are Fighting. “OPEC vs. U.S.: Who Will Blink First on Oil?” CNNMoney. Cable News Network, n.d. Web. 02 Feb. 2015. Retrieved: http://money.cnn.com/2015/01/13/investing/falling-oil-prices-us-opec/

Kota, Sridhar. “Fracking’s Unexpected Benefit: U.S. Manufacturing Oversight, Accountability.” The Huffington Post. TheHuffingtonPost.com, n.d. Web. 01 Feb. 2015. Retrieved: http://www.huffingtonpost.com/sridhar-kota/frackings-unexpected-envi_b_5907334.html

“Lowest Gas Prices Since 2009 Shouldn’t Stop Support For Keystone Pipeline.” Illinois Conservative Examiner. N.p., n.d. Web. 02 Feb. 2015. Retrieved: http://www.ice-news.net/2014/12/31/lowest-gas-prices-since-2009-shouldnt-stop-support-for-keystone-pipeline/

Mufson, Steven. “How Low Can Oil Prices Go? Welcome to the Oil Market’s Old Normal.” Washington Post. The Washington Post, 12 Jan. 2015. Web. 31 Jan. 2015. Retrieved: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/12/how-low-can-oil-prices-go-welcome-to-the-oil-markets-old-normal/

Noah, Timothy. “Why the US Shouldn’t Export Its Oil.” Msnbc.com. NBC News Digital, 27 June 2014. Web. 02 Feb. 2015. Retrieved: http://www.msnbc.com/msnbc/why-the-us-shouldnt-export-its-oil

Perlberg, Steven. “10 Reasons Why America Will Continue To Dominate The Global Economy For Years.” Business Insider. Business Insider, Inc, 22 June 2013. Web. 02 Feb. 2015. Retrieved: http://www.businessinsider.com/10-ways-us-competitive-advantage-2013-6

Plumer, Brad. “Why Oil Prices Keep Falling – and Throwing the World into Turmoil.” Vox. N.p., 23 Jan. 2015. Web. 31 Jan. 2015. Retrieved: http://www.vox.com/2014/12/16/7401705/oil-prices-falling

“Stop the Proposed Keystone XL Pipeline.” Stop the Keystone XL Pipeline Project. National Resources Defense Council, n.d. Web. 01 Feb. 2015. Retrieved: http://www.nrdc.org/energy/keystone-pipeline/

Thompson, Loren. “What Happens When America No Longer Needs Middle East Oil?” Forbes. Forbes Magazine, 3 Dec. 12. Web. 01 Feb. 2015. Retrieved: http://www.forbes.com/sites/lorenthompson/2012/12/03/what-happens-when-america-no-longer-needs-middle-east-oil/

“U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” How Much Does It Cost to Produce Crude Oil and Natural Gas? N.p., n.d. Web. 31 Jan. 2015. Retrieved: http://www.eia.gov/tools/faqs/faq.cfm?id=367&t=6

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Relephant Links:

Breaking News: President Obama Vetoes Keystone Pipeline, Condemning Big Oil and Gas.

We’re all Fracked—Waylon Lewis with Fractivist Shane Davis.

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 Author: Samantha Cole-Johnson

Editor: Emma Ruffin

Photo: UNIDO/Flickr

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