DESPITE OBAMA: Congratulations, America. You're (Almost) Energy Independent. Now what?

By DANIEL YERGIN

 
For four decades, whenever the American political debate turned to energy, the discussion was all about shortage and scarcity, a reality that haunted the United States ever since the global oil crises of the 1970s.

That conversation is over.

And now the unconventional energy revolution—newly accessible supplies of shale gas and oil—is creating a new discourse on energy that is changing politics and policies. All of this represents what Energy Secretary Ernest Moniz calls a “new mentality” about America’s energy position, with a new political language to match.

Exactly 40 years ago, in November 1973, President Richard Nixon went on television to promise the American people energy “independence” within 10 years. Just three weeks earlier, on Oct. 17, 1973, Arab petroleum exporters had instituted an oil embargo to punish the West and, in particular, the United States, for its support of Israel during the Yom Kippur War.

Americans were shocked by the embargo—and by the quadrupling of oil prices that followed. Six years later, the Iranian Revolution toppled the shah, one of America’s closest allies in the Middle East, further disrupting the global oil supply. All this was completely at odds with the pervasive American assumption of abundance that had been shaped by decades and decades of ample supply. As late as World War II, six out of every seven barrels of oil used by the Allies had been exported from the continental United States. In 1973, most Americans did not even know that the United States imported any oil. Given that, many assumed that the price increases caused by the embargo had to be the result of manipulation. It was just hard to accept that global markets could become so vulnerable to disruptions that could send prices spiraling up.

The shortage theory certainly seemed to be borne out by what happened in the decades after 1973. When Nixon made his energy independence speech, the United States was importing 35 percent of its oil. By 2005, it was importing 60 percent. Over the same period, U.S. oil production fell by more than a third. Natural gas output also declined. By 2005, it looked as though the United States was going to become a huge importer not only of oil but also of natural gas in the form of more costly liquefied natural gas (LNG). Nixon’s promise of energy independence became a standard pledge of every succeeding president, but with imports rising, it seemed an ever more distant hope—indeed, even fodder for late-night comedians—not the stuff of political reality.

Then came shale gas and tight oil. Although the technological breakthroughs enabling this production boom occurred from 1998 to 2003, the results did not show up in the numbers until 2008. But it’s now clear that a revolution has occurred: U.S. crude oil production is up 50 percent since 2008. Thanks to that increase, as well as more efficient automobiles, petroleum imports have fallen from their high of 60 percent in 2005 to 35 percent today—exactly what they were in 1973! And as domestic production increases and gasoline mileage improves, imports will continue to go down. North Dakota, the center of the now-famous Bakken Formation shale, has overtaken Alaska and California to become the second-largest oil-producing state in the country, outpaced only by Texas. U.S. natural gas production has increased by nearly a third since 2005, and shale gas has gone from 2 percent of output in 2000 to 44 percent today.

North Dakota's fracking boom from above.

Now, “energy independence” is back in vogue, not as a joke but as a serious topic of political discussion. It’s not likely that the United States will actually become energy independent in the foreseeable future, but it will certainly become energy a-lot-less-dependent.

The surge in production and the fall in imports would in themselves call for recasting the political discourse. But the economic impact of this revolution is broader even than those numbers suggest. A recent study by IHS, the energy consulting firm where I work, estimates that 2.1 million jobs were supported by this energy boom in 2012, and we project that to rise to 3.3 million jobs by 2020. It meant an additional $74 billion in federal and state revenues in 2012, and, owing to lower energy costs, an increase of $1,200 in average household disposable income across the United States. With U.S. natural gas prices a third of those in Europe, it is also making the United States a much more competitive place for industry, helping to power what President Obama has called a “renaissance in American manufacturing”—many tens of billions of dollars of new investment going into manufacturing facilities. And the increase in domestic oil production has reduced the annual U.S. trade deficit, at current prices, by about $85 billion.

Once Upon a Time in North Dakota

How oil is scrambling politics in the Rough Rider State.

The Wild, Wild North

Cities and towns in North Dakota’s northwestern “oil patch” are working to keep order among the tens of thousands of young men who have flocked there for jobs. Since 2008, the city of Williston, for instance, has passed ordinances requiring liquor license holders to be “legal and bona fide” North Dakota residents, banning the sale of alcohol after 1 a.m., prohibiting RVs in residential areas and limiting“adult cabaret and sexually oriented businesses” to the town’s heavy industrial district.

Sharing the Spoils

In 2013, North Dakota lawmakers used their entire 80-day legislative session for the first time ever, to decide how to spend the state’s $1.3 billion surplus. Majority Republicans—even those from the oil-rich northwest—called for fiscal restraint, while Democrats pushed to give more money to local governments for roads, hospitals and other services under strain from population growth. The legislature passed a record $13.7 billion two-year budget—30 percent higher than the last one—including $1.14 billion “to address the needs associated with the rapid economic expansion related to the oil boom” in western North Dakota.

Red State Rising

Thanks to an influx of job-seekers that has bumped up the state’s population to 700,000, North Dakota—the only state without voter registration—had nearly 30,000 additional eligible voters in the 2012 election. Voter turnout was up by only 4,500 from 2008, but all 53 counties voted more Republican in the presidential contest, with a slightly larger shift toward the GOP among the nine counties at the heart of the Bakken Formation (already the most conservative part of the state). Still, North Dakotans also elected moderate Democrat Heidi Heitkamp to the U.S. Senate, albeit by just 1 percentage point.

These economic opportunities have captured the attention of such governors as Republican John Kasich of Ohio and Democrat John Hickenlooper of Colorado. In addition to promising sound state regulation of drilling, they have emphasized what this means in terms of jobs, industrial development, revenues both for the state and for farmers struggling to hang on to their land, and revitalization of decaying rural areas that are losing the next generation. As Kasich put it, development of the state’s Utica Shale will help parents get their grown children “out of their attic and actually get a job.” It’s been a long time since anyone in American politics—at least outside of places like Texas and Oklahoma—talked about oil and gas in terms of jobs here at home.

Then there is the geopolitical impact. The increase in U.S. oil production since just 2008 is greater than the entire output of Nigeria, one of the major OPEC producers, and more than Iran’s entire exports prior to the sanctions that have sliced its export level roughly in half since 2011. Indeed, without the increase in U.S. oil production, it’s very hard to see how the oil sanctions on Iran could have worked.

Obama’s own words are another way to measure the stark change in the politics of energy that has occurred on his watch. In his first two State of the Union addresses, the president mentioned the words “natural gas” just once. But in his 2012 address, he talked about the need for an “all-of-the-above” energy strategy and gave more time to oil and gas than to the promise of developing alternative sources like wind and solar. He has frequently cited the job creation resulting from shale. In a major climate speech this past June, he declared, “We should strengthen our position as the top natural gas producer because, in the medium term at least, it not only can provide safe, cheap power, but it can also help reduce our carbon emissions.”

The Great American Boom

Washington might look like a disaster zone, but luckily the world is not waiting for America’s political system to reboot: In many ways, the United States is enjoying an unlikely boom. Our special report spotlights several of these techno-charged transformations and their surprising political consequences, from reviving cities (and busting suburbs) to a new age of digital haves (and have-nots) and the return of the United States as the world’s top oil and gas producer for the first time in years. It’s a time to expect the unexpected.

Perhaps the most striking example of how Obama’s language has changed came last year in his debate with Republican challenger Mitt Romney, when he said something that certainly would not have been heard in a debate in 2008: “On energy, Governor Romney and I, we both agree that we’ve got to boost American energy production, and oil and natural gas production are higher than they’ve been in years.”

Of course, not everybody agrees. There was previously support in the environmental community for natural gas as a lower-carbon alternative to coal. Now, as natural gas supplies are growing, the environmental movement is split. Some continue to support the growth in shale gas, properly regulated, as a way to push coal out of electric generation. They point to the increased use of gas as one of the most important reasons for the dramatic decline in U.S. carbon emissions—back to the level of 1995—despite the U.S. economy growing by more than 50 percent in the years since.

Other environmentalists are mobilized in opposition to hydraulic fracturing—better known as “fracking,” a word few would have even known a decade ago but which is now part of the political vocabulary. They worry about the possibility of local pollution related to extracting the shale gas and about the growing abundance of a low-cost, low-carbon fossil fuel that competes with higher-cost wind and solar power. They also want to take the regulation of drilling out of the hands of the states, which have controlled it for more than a century, and move it under the purview of the Environmental Protection Agency, which they believe would be much more restrictive.

But even as we’re still arguing over fracking and the environmental impact of natural gas, the debate about imports—the one that consumed us for decades and decades—is largely over. Today, we are arguing about exports. The natural gas market in the United States is oversupplied and in surplus. It is now constrained by lack of demand, not lack of supply. One new market is exports. Facilities that were started half a decade or more ago to receive LNG from abroad are now being reconfigured to export it, setting off what has been a fierce debate over whether the United States should become a major natural gas exporter for the first time.

The next debate will be on an even more sensitive subject: whether the United States should export crude oil. With a few minor exceptions, crude oil exports are prohibited, a relic of 1970s oil crisis-era legislation. Yet the rapid growth in domestic production, along with differences in the quality of various grades of oil and differences in refining capacity, suggests that in some instances it would make much more economic sense to export crude oil from some ports and import it at others.

Over most of the past 40 years, the idea that the United States could even be talking about such an issue would have seemed improbable, even ridiculous. But that will very likely be part of the political debate in 2014, and a hot part—a clear demonstration of just how much the way America talks and thinks about energy is changing. What would Richard Nixon say now?

Daniel Yergin is vice chairman of the global information company IHS and author of The Quest: Energy, Security, and the Remaking of the Modern World.