A Four-Step Energy Strategy For Our Time

It’s a sign of the times: The Islamic State is getting millions in oil revenues. According to one news organization, the terror group is even recruiting petroleum engineers. And farther north, Ukrainian president Petro Poroshenko secured a promise from the White House last week for the U.S. to join in a review of his country’s Russian energy entanglements. Meanwhile, North Dakota’s shale fields just passed 1 million barrels per day of production, a milestone only three fields in the U.S. have reached. For context, only ten shale fields have reached it in world history.

These events point to the need for a radically new American energy strategy.

The United States has the capability to launch a full-scale industrial assault on global energy markets, reducing revenues for a host of bad actors. Our technological, resource, and infrastructure advantages now allow us to utterly realign global money flows.

Money from selling hydrocarbon fuels is locked into the future. Every realistic forecast — whether from the U.S. Energy Information Administration or the International Energy Agency — predicts that the world’s $5 trillion of oil and gas purchases will rise 150 percent over the coming several decades. And that assumes rapid development in alternative energy. The big change now? The prospect of America breaking up the duopoly of Russia and the Middle East in world hydrocarbon trade.

The beauty of such a bold strategy would be twofold. First, the mere announcement would have an immediate impact. Today’s prices, and contracts to build out infrastructure, are set by future expectations; this would change with the prospect of America as a major supplier. Second, implementing the strategy would cost American taxpayers nothing — and would actually add hundreds of billions of dollars to the U.S. economy and create millions of jobs.

There are four straightforward steps to implement such a strategy.

Step 1: Encourage yet more production on private and state lands. This could be done with expeditious regulatory approvals, as opposed to today’s heel-dragging, especially relating to collateral infrastructure from pipelines to refineries and ports (think Keystone pipeline). And to really accelerate things, we could offer the classes of tax credits, subsidies, and special favors now given to non-hydrocarbon energy.

Step 2: Completely repeal antiquated laws that constrain or ban exports of natural gas and petroleum. These anti-free-trade rules were put in place eons ago when people thought we were running out of energy. This no-cost move would, by itself, stimulate more production. American companies shouldn’t have to ask for permission to sell to overseas buyers; the federal government should help them do it.

Step 3: Reduce corporate taxes, not just to stimulate more production and jobs, but also to accelerate the trend of foreign investment in the U.S. energy sector; nearly $200 billion has already flowed here in the past half-dozen years. We could even offer a tax holiday for the repatriation of foreign profits of American firms, provided the money supports the strategy.

Step 4: Open up federal lands for more oil and gas production to reverse the six-year decline in output under current policies. The feds control half America’s land and nearly all off-shore domains, but lease under 2 and 6 percent, respectively, of the controlled territories. Let’s have a policy to foster growth in production on federal lands to match what’s happening on private and state lands.

This four-step strategy veers sharply from current policies, which not only discourage oil and gas development but also promote expensive options to try to diminish the use of hydrocarbons, such as biofuels, wind, and solar power. Biofuels remain prohibitively costly and environmentally damaging, and — while consuming 40 percent of America’s corn crop — they displace under 5 percent of the country’s transportation fuel. The permanent gas glut has made wind and solar even less competitive, and without subsidies neither could survive. Still, as a practical matter, promoting alternative energy can coexist with the strategy outlined above.

Over the past half-dozen years, without incentives, special subsidies, grants, or stimulus, the U.S. has become the world’s fastest-growing natural gas and oil producer — moving up from second to first place in the former; on track to take first place for the latter.

This energy revolution has taken place entirely on private and state lands, not from new discoveries but from new technologies that unlock vast supplies from existing resources. Even with $70 billion of new gas-consuming factories under construction, our domestic markets can’t come close to consuming the output. On the oil front, the boom has returned production to levels last seen 40 years ago and has cut imports 60 percent.

It is not enough that we import less. It is critical that American firms become sellers to the world. Our European allies fully appreciate the potential geopolitical benefits of having America as an energy supplier to reduce dependence on Russia. A leaked European Union memo from this past summer’s bilateral trade negotiations with the U.S. contained an explicit plea for America to eliminate constraints on shipping crude and natural gas to Europe. Indeed, nearly everyone buying from the Middle East would welcome a different and more secure option.

Like it or not, the world is going to burn more fuels. Better these fuels are bought from us; we benefit economically while contributing to world stability.

This article appeared on the RealClearEnergy website at http://www.realclearenergy.org/articles/2014/09/23/a_four-step_energy_strategy_for_our_time_108030.html

Partner & Fellow Blogs