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The reversal of fortune in America’s energy supplies in recent years holds the promise of abundant and cheaper fuel, and it could have profound effects on what people drive, domestic manufacturing and America’s foreign policy.

Cheaper fuel produced domestically could reduce the cost of shipping and manufacturing, trim heating and cooling bills, improve the auto market and provide tens of thousands of new jobs.

It might also pose new environmental challenges, both predictable and unforeseen, by damping enthusiasm for clean forms of energy and derailing efforts to wean the nation from its wasteful energy habits.

But for Americans battered by rising gasoline prices, frustrated by the dependence on foreign oil, skeptical of the benefits or practicality of renewable fuels and afraid of nuclear power, the appeal of plentiful domestic oil and gas could far outweigh the costs.

Just a few years ago, the dominant theme in discussions about energy was of declining production and the fear of running out of oil. Even today, political tensions in the Middle East, particularly in the Persian Gulf, have fanned fears of supply disruptions that are keeping prices high.

But a new boom in energy production in recent years has upended these expectations in record time. High energy prices led to a wave of successful oil and gas exploration in North America, including in fields that were deemed uneconomical only a few years ago. Using techniques like horizontal drilling and hydraulic fracturing, oil companies are tapping into deeply buried reserves in shale rocks and in the ocean’s depths.

The surge in energy prices, along with a recession and new government rules that tightened fuel-economy standards, led to a sharp cutback in gasoline consumption. This decline in demand in the last five years reversed decades of almost uninterrupted growth that made the United States the world’s top energy consumer, accounting for one in every four barrels of oil burned around the globe.

The North American energy revival is primarily the result of so-called unconventional sources of energy — like shale oil and shale gas across the United States, oil sands in Canada and deepwater production in the Gulf of Mexico. In the last five years, the United States and Canada combined have become the fastest-growing sources of new oil supplies around the world, overtaking producers like Russia and Saudi Arabia.

“The transformation unfolding in North America represents a potentially decisive shift in the history of energy,” Rex Tillerson, the chairman and chief executive of Exxon Mobil, who is not usually given to hyperbole, said in a speech in Houston last month.

Ed Morse, head of global commodity research at Citigroup and a longtime energy analyst, says North America has the potential to become a “new Middle East.”

“The reduced vulnerability of North America — and the world market — to oil price spikes also has deep consequences geopolitically, including the reduced strategic importance to the U.S. of changes in oil- and natural gas-producing countries worldwide,” Morse said in a recent 92-page report called Energy 2020. “Pressures toward isolationism in the U.S. will likely grow, with consequences for global stability that can only just begin to become understood.”

“The only thing that could stop this is politics — environmentalists getting the upper hand over supply in the U.S., for instance,” the report said.

The new supplies ensure that the United States will remain well entrenched in oil, but the continuing reliance on fossil fuels also carries significant environmental concerns — whether from the risk of offshore drilling, or the hazards, many still unknown, of hydraulic fracturing. It also means that greenhouse gas emissions will most likely increase, at least until carbon emissions are capped or new technology to store carbon dioxide underground is developed.

Supply and demand

The glut of natural gas supplies cuts two ways on emissions. It has effectively put an end in the United States to any new investment in coal plants, which produce much more emissions. But it also makes the economics of alternative, noncarbon energy sources like wind power or solar power difficult to justify without public support and subsidies.

Regardless of the environmental impact, there is no guarantee that new supplies will inevitably lead to lower gasoline prices, as proponents of unfettered domestic drilling argue. Oil is a global commodity with a price set on the global market. With rising demand around the world, particularly in emerging economies, and instability in many oil-producing countries, many analysts predict global oil prices will remain volatile — and high — for many years to come.

And with gasoline prices above $4 a gallon, the nation’s energy resources remain a polarizing topic, pitting Republicans against Democrats, environmentalists against oil companies, and conservationists against advocates of unfettered drilling.

“It is remarkable how quickly perceptions have changed,” says Guy Caruso, the administrator of the U.S. Energy Information Administration from 2002 to 2008, who is now at the Center for Strategic and International Studies. “We may be in the early stage of this transformation, and clearly things could still go wrong.”

Energy production is an inherently risky business, but recent history suggests that when resources are available they end up being developed.

After the explosion of BP’s deepwater well two years ago in the Gulf of Mexico, leading to the biggest oil spill in American history, the Obama administration imposed a moratorium on offshore drilling. But it took only about a year for exploration and production to resume offshore.

Cheaper energy costs — particularly for natural gas — would benefit a variety of domestic industries, like chemicals, pharmaceuticals and fertilizers. The rise in natural gas production has already led many utility companies to shift their electrical production away from coal; it also calls into question talk of a nuclear revival in the United States.

Economists say that ample gas supplies might also provide the basis for a resurgence of U.S. manufacturing, which has been battered by high energy costs for much of the last decade.

Natural gas prices have fluctuated wildly in recent years, rising to $14 for a thousand cubic feet from $2 within a few years. The current glut, however, has driven prices back down again, to near $2 for a thousand cubic feet.

With America becoming one of the top natural gas producers, some domestic companies might rethink moving parts of their business to countries with cheaper energy costs. (At current consumption rates, U.S. gas reserves would last at least 75 years, an estimate some experts say is conservative.)

Lower natural gas costs would also have cascading benefits to other commercial sectors, like retailing. Shipping costs may be lower, particularly if transportation companies shift their fleets to natural gas-powered or electric vehicles. FedEx, for instance, has already been adding clean energy trucks to its fleet, including hybrid and all-electric delivery trucks in cities like Chicago.

Economic growth

Citigroup estimates that as many as 3.6 million new jobs might be created by 2020 thanks to the energy boom. The current trade deficit might fall by 60 percent by the end of the decade from today’s level, according to the bank’s estimates, and the dollar could appreciate by as much as 5.4 percent as imports shrink.

“In a world of high energy prices, the potential economic activity generated by this wave of new hydrocarbon production is extraordinary and should strongly boost national output, increase incomes, create wealth, stimulate consumption and create jobs,” according to Citigroup.

Given how swiftly expectations have shifted to describe America’s energy prospects, however, some caution may be warranted.

Opposition from environmental groups and concerns about climate change — which is caused by increased carbon emissions from fossil fuels — could lead to tighter regulation of petroleum products or derail infrastructure projects like pipelines.

That is what has happened to the extension of the Keystone XL Pipeline, which its supporters say is needed to increase the import of oil from Canada’s oil sands into the United States. That project has faced stiff opposition from environmental groups because oil sands are more energy-intensive and emit more carbon dioxide into the atmosphere than traditional oil sources.

Geologists have long known that shale basins across the country, like the Bakken field in North Dakota, Eagle Ford and Barnett in Texas, and the Marcellus in the Northeast, held tremendous oil and gas reserves. But energy companies had no economic way to collect them until new technology recently changed that.

The results have been impressive. Production from the Bakken region alone has gone from negligible quantities to 500,000 barrels of oil a day in just a few years. Production at Eagle Ford produced just 787 barrels in 2004. Last year, its production reached 30.5 million barrels, according to state regulators, and it is still growing. Natural gas production there went from nothing to 243 billion cubic feet in just three years. The National Petroleum Council, an industry-led group that provides advice to the secretary of energy, recently outlined its view of how the nation’s larger-than-expected resource might be developed.

In a major study released last year, the group forecast that North American oil production might exceed 20 million barrels a day by 2035 under a “high potential” situation of unfettered access.

However, under a “limited” situation where production was constrained for a variety of environmental or political reasons, domestic supplies might fall to less than 10 million barrels a day.

Some experts are more bullish. Morse of Citigroup forecast that North American oil production could reach an astounding 27 million barrels a day by 2020, almost twice the rate of production of 15 million barrels a day at the end of 2011. Production from the United States could grow to 15.6 million barrels a day by 2020, up from 9 million barrels a day in 2011.

If that trend continues, the growth in oil and natural gas supplies in the next decades could turn the United States into a top energy exporter, rivaling some members of the Organization of the Petroleum Exporting Countries. Natural gas could be sold to Mexico and Canada (because exploiting oil sands is so energy-intensive, Canada might have to import natural gas to produce its oil). Refined petroleum products, and even crude oil, could find customers in Europe and Latin America. Coal could be exported to China.

With less gasoline demand, the nation’s surplus refining capacity means the United States is already exporting petroleum products — like gasoline and diesel. The United States is now the top exporter of refined products, just ahead of Russia.

Energy independence

Assessing falling American dependence on foreign oil, analysts with the financial firm Raymond James said imports fell from 65 percent of demand, or 13.5 million barrels a day, their peak in 2005, to 9.8 million barrels a day in 2011, or 52 percent of demand. They predicted that imports would keep falling, reaching 4.5 million barrels a day — or just a quarter of domestic oil demand — by 2015. By 2020, they forecast, the United States would not need to import foreign oil anymore.

“The resulting savings from the standpoint of the trade deficit are highly meaningful,” the analysts said, “especially when the benefits of cheaper energy for domestic manufacturing are taken into account. Maybe the real question is, When will Washington apply to join OPEC?”

While the question is provocative, the change in outlook for domestic supplies, along with the changed role of the United States in global energy markets, carries important economic and geopolitical lessons.

James Brick, an energy analyst with Wood Mackenzie, a research firm, said in a recent report that by 2030 the United States could end up exporting 500 million tons of coal a year, 3.2 billion cubic feet a day of natural gas and 2.5 million barrels a day of oil products.

“The United States will be playing a very different role on the energy markets, a much more international role and a much more complicated and sophisticated one,” said Brick. “As with any forecast there are uncertainties but no matter how you cut it, the United States has the resources in the ground.”

 

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The U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency, a goal the nation has been pursuing since the 1973 Arab oil embargo triggered a recession and led to lines at gasoline stations.

Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal. Methanex Corp., the world’s biggest methanol maker, said it will dismantle a factory in Chile and reassemble it in Louisiana to take advantage of low natural gas prices. And higher mileage standards and federally mandated ethanol use, along with slow economic growth, have curbed demand.

The result: The U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011, according to data compiled by Bloomberg from the U.S. Department of Energy. That would be the highest level since 1992.

“For 40 years, only politicians and the occasional author in Popular Mechanics magazine talked about achieving energy independence,” said Adam Sieminski, who has been nominated by President Barack Obama to head the U.S. Energy Information Administration. “Now it doesn’t seem such an outlandish idea.”

The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.

Output Rising

U.S. energy self-sufficiency has been steadily rising since 2005, when it hit a low of 70 percent, the data compiled by Bloomberg show. Domestic crude oil production rose 3.6 percent last year to an average 5.7 million barrels a day, the highest since 2003, according to the Energy Department. Natural gas output climbed to 22.4 trillion cubic feet in 2010 from 20.2 trillion in 2007, when the Federal Energy Regulatory Commission warned of the need for more imports. Prices have fallen more than 80 percent since 2008.

At the same time, the efficiency of the average U.S. passenger vehicle has helped limit demand. It increased to 29.6 miles per gallon in 2011 from 19.9 mpg in 1978, according to the National Highway Traffic Safety Administration.

The last time the U.S. achieved energy independence was in 1952. While it still imported some petroleum, the country’s exports, including of coal, more than offset its imports.

Environmental Concern

The expansion in oil and natural gas production isn’t without a downside. Environmentalists say hydraulic fracturing, or fracking — in which a mixture of water, sand and chemicals is shot underground to blast apart rock and free fossil fuels — is tainting drinking water.

The drop in natural gas prices is also making the use of alternative energy sources such as solar, wind and nuclear power less attractive, threatening to link the U.S.’s future even more to hydrocarbons to run the world’s largest economy.

Still, those concerns probably won’t be enough to outweigh the benefits of greater energy independence.

Stepped-up oil output and restrained consumption will lessen demand for imports, cutting the nation’s trade deficit and buttressing the dollar, said Sieminski, who is currently chief energy economist at Deutsche Bank AG in Washington.

Cutting Trade Deficit

With the price of a barrel of oil at about $100, a drop of 4 million barrels a day in oil imports — which he said could happen by 2020, if not before — would shave $145 billion off the deficit. Through the first 11 months of last year, the trade gap was $513 billion, according to the Commerce Department. Crude for March delivery settled at $96.91 a barrel yesterday on the New York Mercantile Exchange.

The impact on national security also could be significant as the U.S. relies less on oil from the Mideast. Persian Gulf countries accounted for 15 percent of U.S. imports of crude oil and petroleum products in 2010, down from 23 percent in 1999.

“The past image of the United States as helplessly dependent on imported oil and gas from politically unstable and unfriendly regions of the world no longer holds,” former Central Intelligence Agency Director John Deutch told an energy conference last month.

Arab Oil Embargo

That dependence was underscored in October 1973, when Arab oil producers declared an embargo in retaliation for U.S. help for Israel in the Yom Kippur war. The U.S. economy contracted at an annualized 3.5 percent rate in the first quarter of the next year. Stock prices plunged, with the Standard & Poor’s 500 Index dropping more than 40 percent in the year following the embargo.

Car owners were forced to line up at gasoline stations to buy fuel. President Richard Nixon announced in December that because of the energy crisis the lights on the national Christmas tree wouldn’t be turned on.

Today, signs of what former North Dakota Senator Byron Dorgan says could be a “new normal” in energy are proliferating. The U.S. likely became a net exporter of refined oil products last year for the first time since 1949. And it will probably become a net exporter of natural gas early in the next decade, said Howard Gruenspecht, the acting administrator of the EIA, the statistical arm of the Energy Department.

Cheniere Energy Partners LP may receive a construction and operating permit as early as this month from the Federal Energy Regulatory Commission for the first new plant capable of exporting natural gas by ship to be built since 1969 in the U.S. Houston-based Cheniere said it expects the $6 billion plant to export as much as 2.6 billion cubic feet of gas per day.

Mitchell the Pioneer

The shale-gas technology that’s boosting U.S. natural gas production was spawned in the Barnett Shale around Dallas and Fort Worth by George P. Mitchell, who was chairman and chief executive officer of Mitchell Energy & Development Corp.

Helped by a provision inserted in the 1980 windfall oil profits tax bill to encourage drilling for unconventional natural gas, the Houston-based oil man pursued a trial-and-error approach for years before succeeding in the late-1990s. The fracking method he devised cracked the rock deep underground, propping open small seams that allowed natural gas trapped in tiny pores to flow into the well and up to the surface.

Recognizing that Mitchell was on to something, Devon Energy Corp. bought his company in 2002 for about $3.3 billion and combined it with its own expertise in directional drilling, a method derived from offshore exploration.

Hunting for Oil

Traditional vertical drilling bores straight down, like a straw stuck straight in the earth. Directional drilling bends the straw, boring horizontally sometimes a mile or more through the richest layer of rock, allowing more of the trapped fuel to make it into the well. This slice of rock is like the kitchen, where ancient plants and creatures came under so much pressure that they cooked into natural gas and oil.

The oil boom a century ago tapped reservoirs of fuel that rose out of those layers and got trapped in large pockets closer to the earth’s surface, or used vertical wells that could get out only a portion of the fuel stored in the rock. The new technology has Devon and its competitors hunting beneath decades-old oil plays long thought depleted.

About an hour’s drive north from where Devon’s soon-to-be- completed new glass headquarters towers 50 stories above downtown Oklahoma City, the company is exploring for oil in the Mississippian and other formations, where oil majors once made their fortunes. It’s racing companies such as Chesapeake Energy Corp. and SandRidge Energy Inc. to buy leases and drill wells.

North Dakota Booming

Crude production in the U.S. is already increasing. Within three years, domestic output could reach 7 million barrels a day, the highest in 20 years, said Andy Lipow, president of Lipow Oil Associates in Houston, a consulting firm. The U.S. produced 5.9 million barrels of crude oil a day in December, while consuming 18.5 million barrels of petroleum products, according to the Energy Department.

North Dakota — the center of the so-called tight-oil transformation — is now the fourth largest oil-producing state, behind Texas, Alaska and California.

The growth in oil and gas output means the U.S. will overtake Russia as the world’s largest energy producer in the next eight years, said Jamie Webster, senior manager for the markets and country strategy group at PFC Energy, a Washington- based consultant.

While U.S. consumers would still be susceptible to surges in global oil prices, “we’d end up sending some of that cash to North Dakota” rather than to Saudi Arabia, said Richard Schmalensee, a professor of economics and management at the Massachusetts Institute of Technology in Cambridge.

1.6 Million Jobs

The shale gas expansion is already benefiting the economy. In 2010, the industry supported more than 600,000 jobs, according to a report that consultants IHS Global Insight prepared for America’s Natural Gas Alliance, a group that represents companies such as Devon Energy and Chesapeake Energy.

More than half were in the companies directly involved and their suppliers, with the balance coming at restaurants, hotels and other firms. By 2035, the number of jobs supported by the industry will rise to more than 1.6 million, IHS said. Some 360,000 will be directly employed in the shale gas industry.

The oil boom is also pushing up payrolls. Unemployment in North Dakota was 3.3 percent in December, the lowest of any state. Hiring is so frantic that the McDonald’s Corp. restaurant in Dickinson is offering $300 signing bonuses.

State governments are reaping benefits, too. Ohio is considering a new impact fee on drillers and increasing the tax charged on natural gas and other natural resources extracted, Governor John Kasich has said.

In Texas, DeWitt County Judge Daryl Fowler has negotiated an $8,000-per-well fee from drilling companies to pay for roads in the district, southeast of San Antonio.

Lot of Traffic

“It takes 270 loads of gravel just to build a pad used for drilling a well, which means a lot of truck traffic on a lot of roads that nobody except Grandpa Schultz and some deer hunters may have used in the past,” said Fowler, whose non-judicial post gives him administrative control over the county.

The federal government will see tax payments from shale gas rise to $14.5 billion in 2015 from $9.6 billion in 2010, according to IHS. Over the period 2010 to 2035, revenue will total $464.9 billion, it said.

Manufacturing companies, particularly chemical makers, also stand to win as the shale bonanza keeps natural gas cheaper in the U.S. than in Asia or Europe.

Dow Chemical Co., which spent a decade moving production to the Middle East and Asia, is leading the biggest expansion ever in the U.S. The chemical industry is one of the top consumers of natural gas, using it both as a fuel and feedstock to produce the compounds it sells.

First Since 2001

Midland, Michigan-based Dow is among companies planning to build crackers, industrial plants typically costing $1.5 billion that process hydrocarbons into ethylene, a plastics ingredient.

The new crackers will be the first in the U.S. since 2001, said John Stekla, a director at Chemical Market Associates Inc., a Houston-based consultant.

Vancouver-based Methanex said last month it plans to take apart the idled Chilean factory and ship it to Louisiana to capitalize on natural gas prices.

The shift to increased energy independence is also the result of government policies to depress oil demand.

“Vehicles are getting more efficient, and people who travel won’t be driving more miles,” said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

Automakers have agreed to raise the fuel economy of the vehicles they sell in the U.S. to a fleetwide average of 54.5 miles per gallon by 2025 under an agreement last year with the Obama administration.

No ‘Silver Bullet’

The 2008-09 recession helped lower oil demand, and consumption has lagged even as the economy has recovered, said Judith Dwarkin, director of energy research for ITG Investment Research in Calgary. Coupled with higher domestic output, “this has translated into an import requirement of some 15.4 barrels per person per year — about on par with the mid-1990s.”

She cautioned against thinking that rising oil and gas production is a “silver bullet” for solving U.S. economic woes.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, agreed, saying in a Jan. 20 note to clients that oil and gas output accounts for just 1 percent of gross domestic production and isn’t likely on its own to be able to pull the economy into above-trend growth.

Cooling on Wind

Some companies are hurting from the shale gas glut. With abundant supplies making it the cheapest option for new power generation, Exelon Corp. scrapped plans to expand capacity at two nuclear plants, while Michigan utility CMS Energy Corp. canceled a $2 billion coal plant after deciding it wasn’t financially viable. NextEra Energy Inc., the largest U.S. wind energy producer, shelved plans for new U.S. wind projects next year.

Investors also are cooling on wind investment, partly because of falling power prices. T. Boone Pickens, one of wind power’s biggest boosters, decided to focus on promoting natural gas-fueled trucking fleets after dropping plans for a Texas wind farm in 2010.

“Wind on its own without incentives is far from economic unless gas is north of $6.50,” said Travis Miller, a Chicago- based utility analyst at Morningstar Inc. Natural gas for March delivery settled at $2.55 per million British thermal units on New York Mercantile Exchange yesterday.

When Obama lauded increased energy production in his State of the Union speech on Jan. 24, he drew criticism from some environmentalists opposed to fracking.

Waning Confidence

“We’re disappointed in his enthusiasm for shale gas,” said Iris Marie Bloom, director of Protecting Our Waters in Philadelphia. Obama “spoke about gas as if it’s better for the environment, which it’s not.”

Deutch, who headed an advisory panel on fracking for the Energy Department, voiced concern that public confidence in the technology will wane if action isn’t taken to address environmental concerns. The potential positive impact of increased North American production are “enormous,” he said.

Higher U.S. output lessens the ability of countries like Iran and Russia to use “energy diplomacy” as a means of strengthening their influence, Amy Myers Jaffe, director of the Baker Institute Energy Forum at Rice University, and her colleagues wrote in a report last year.

While the U.S. will still have to pay attention to issues such as Israel’s security and Islamic fundamentalism in the Mideast, which could affect oil prices, it won’t have to be as worried about its supplies.

Positive ‘Shock’

Carlos Pascual, special envoy and coordinator for international energy affairs at the State Department, suggested at a Council on Foreign Relations conference in December that the increased production in the U.S. and elsewhere gives Washington more “maneuverability” in using sanctions to deal with Iran and its nuclear aspirations.

The increased U.S. production of oil and natural gas is a “positive supply shock” for the economy and for national security, said Philip Verleger, a former director of the office of energy policy at the Treasury Department and founder of PKVerleger LLC, a consulting firm in Aspen, Colorado.

“We aren’t there yet, but it looks like we’re blundering into a solution for the energy problem,” he said.

 

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Recent Iranian saber rattling about closing the Strait of Hormuz is yet another reason for the U.S. to look north to Canada for oil imports. Military confrontation or a perceived threat of it in the strait — the route for almost 17 million barrels of oil daily — would wreak havoc on global oil supplies. The effects for the United States would be particularly severe: 75 percent of oil from Saudi Arabia, which at 12 percent of net U.S. imports of crude oil and petroleum products is our second-largest supplier, passes through this strategic waterway.

Occasional threats to global oil supply are one reason why U.S. energy security requires “an all-out, all-of-the-above strategy,” as President Barack Obama put it in his 2012 State of the Union address. Though this strategy must include cleaner natural gas, as well as alternative energy sources, the U.S. will continue to depend on oil to satisfy its energy needs in the short-to-medium term.

Here, Canada, which at 25 percent is already the United States’ top source of net oil imports, can play an even-greater role in maintaining the stability of the U.S. energy picture. With 175 billion barrels, the province of Alberta is home to the world’s third-largest oil reserves, behind Saudi Arabia at 260 billion barrels and Venezuela at 211 billion — and it is right in the U.S. backyard.

Canadian oil is also important for maintaining U.S. refinery jobs. Home to nearly half of U.S. refining capacity, the Gulf Coast is dependent on foreign sources for approximately 65 percent of its crude oil, so any disruption in imports could force refineries to scale back their operations. Here, a slowdown in Saudi supply is not the only concern.

Mexico and Venezuela, two of the top four suppliers to the Gulf Coast, are expected to reduce their U.S.-bound exports in the next few years. Mexico, the largest source of Gulf Coast imports with 1.1 million barrels per day (bpd), saw production in its Cantarell field drop by more than 1 million bpd from 2004 to 2009. For the United States, this meant a 500,000-bpd decline in Mexican exports to Gulf Coast refineries from 2006 to 2010. The 2010-2015 outlook for Mexico’s oil production does not look much brighter.

In Venezuela, President Hugo Chávez’s politically motivated management of the state-owned oil company, PDVSA, has led to declines in the country’s oil output. At the same time, although U.S. refineries have the unique capacity to process Venezuela’s heavy crude oil, Chávez would rather ship his crude to Asia than to the United States. If he stays in office past Venezuela’s October presidential election, U.S. refineries would do well to prepare for a further reduction.

Canadian oil is certainly not the sole answer to these hemispheric developments or to solving our overall energy needs, but it can help to maintain a steady flow of oil to U.S. refineries while we continue to explore the large-scale use of alternative energy.

One factor behind much of the opposition to drilling in the Canadian oil sands is that Canada’s oil sands must be processed to create synthetic crude oil suitable for transport by pipeline and refining. This process creates carbon dioxide emissions that, according to Cambridge Energy Research Associates, are 6 percent greater than the average U.S. crude supply on a “wells-to-wheels” basis. Other estimates place it higher.

Besides greenhouse gas emissions, environmentalists also deride the land devastation caused by mining the oil sands. But oil companies are legally obligated to restore land to its original condition, which could mitigate this concern. The impact on Alberta’s forests will be further minimized as in-situ extraction, using pipes and steam to recover resources, increasingly replaces mining. Still, in situ is not without its environmental concerns: The amount of steam used per barrel of oil must be further reduced to decrease emissions and water and energy usage. It is worth noting, too, that at today’s oil prices, the oil sands will likely be developed with or without the U.S. market.

Of course, the Keystone XL Pipeline — a 1,700-mile project that would carry 700,000-830,000 bpd of crude to Oklahoma and the Gulf Coast — is another focus of opposition to Canadian oil. Nearly 600,000 bpd of oil can already flow from Alberta to Illinois and Oklahoma through the existing Keystone Pipeline; if built, Keystone XL would double the amount transported to U.S. refineries — and would bring it all the way to the Gulf of Mexico.

Detractors warn of the environmental consequences if a spill were to occur along the route through Nebraska’s Sandhills wetlands region and the Ogallala Aquifer. These concerns were a top reason why the U.S. Department of State said on Jan. 18 that it “could not make a national interest determination regarding the permit application without additional information.” With that, Obama rejected the pipeline as proposed.

The problem is that politics overtook on-the-ground considerations. In November, the Nebraska Legislature passed a bill that would move the XL pipeline’s path out of the Sandhills and the Ogalla Aquifer, and TransCanada — the Canadian company that would construct the pipeline — agreed to shift the route. But Congress, rather than wait for TransCanada to submit a new application and for the U.S. government to complete a new environmental impact study, inserted a 60-day timeline into the payroll tax extension bill in December to compel Obama to make a final determination on the pipeline.

This will not be the last we hear of Keystone XL in this election year. The proposed pipeline and the jobs it will create are now campaign fodder for Republicans eyeing an opportunity to claim that the president is failing to support job creation. But instead of playing politics with pipeline construction, Congress should allow TransCanada to reapply for approval, as Obama has offered, after it finalizes a new plan that avoids the Sandhills. The political hijacking of a plan to further integrate North American oil does not serve the interests of the United States, especially with continued uncertainty in the Middle East.

 

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TEHRAN | Thu Dec 29, 2011 8:41am EST

(Reuters) – A senior Iranian Revolutionary Guards commander said on Thursday that the United States was not in a position to tell Tehran “what to do in the Strait of Hormuz,” state television reported.

Tehran’s threat to block crude shipments through the crucial passage for Middle Eastern suppliers followed the European Union’s decision to tighten sanctions on Iran over its nuclear program, as well as accompanying moves by the United States to tighten unilateral sanctions.

Iran’s English-language Press TV quoted Hossein Salami as saying: “Any threat will be responded by threat … We will not relinquish our strategic moves if Iran’s vital interests are undermined by any means.”

Separately, Salami was quoted as saying by the official IRNA news agency: “Americans are not in a position whether to allow Iran to close off the Strait of Hormuz.”

The U.S. Fifth Fleet said on Wednesday it would not allow any disruption of traffic in the Strait of Hormuz, a strip of water separating Oman and Iran.

At loggerheads with the West over its nuclear program, Iran said earlier it would stop the flow of oil through the strait in the Gulf if sanctions were imposed on its crude exports.

Analysts say that Iran could potentially cause havoc in the Strait of Hormuz which connects the biggest Gulf oil producers, including Saudi Arabia, with the Gulf of Oman and the Arabian Sea. At its narrowest point, it is 21 miles across.

But its navy would be no match for the firepower of the Fifth Fleet which consists of 20-plus ships supported by combat aircraft, with 15,000 people afloat and another 1,000 ashore.

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(CBS/AP)

RIYADH, Saudi Arabia – Gulf Arab nations are prepared to offset any potential loss of Iranian oil in the world market, a senior Saudi oil official said as Iranian officials stepped up their rhetoric Wednesday about shutting off a key supply route.

The remarks from the world’s largest oil producer came after Iran’s vice president on Tuesday warned his country was ready to close the Strait of Hormuz — a vital waterway through which a sixth of the world’s oil flows — if Western nations impose sanctions on its oil shipments.

And on Wednesday, Iranian navy chief Adm. Habibollah Sayyari, added that Iran’s Navy can readily block the strait if need be. His comments to Iran’s English-language state Press TV came as Iran held a 10-day drill in international waters near the strategic chokepoint.

Western nations are growing increasingly impatient with Iran over its nuclear program, and worries abound that new sanctions on the country could target its oil exports.

The U.S. has sanctions against Iran in place, aimed to pressure Tehran to give up its nuclear program, but have been hesitant to aim them specifically at Iran’s oil exports, on which some U.S. allies are dependent. But the Obama administration has been laying the groundwork for new measures that would penalize foreign partners from doing business with Iran’s central bank, which processes payments from oil exports, according to the New York Times.

The Times also reports that administration officials claim to have a plan in place to keep the strait open.

While the comments by Vice President Mohamed Reza Rahimi and the Iranian admiral may be little more than a warning by the Islamic Republic, they still stoked fears in the market.

A closure of the strait could temporarily cut off some oil supplies and force shippers to take longer, more expensive routes that would drive oil prices higher. It also potentially opens the door for a military confrontation with Iran that would further rattle global oil markets.

The Saudi oil ministry official told The Associated Press that OPEC kingpin Saudi Arabia and other Gulf producers were ready to step in if necessary. He did not say what other routes the Gulf nations could take to ship the oil if the strait was closed off. The official spoke late Tuesday on condition of anonymity because he was not authorized to discuss the issue.

Theodore Karasik, an analyst at the Dubai-based Institute for Near East and Gulf Military Analysis, said Iran would likely need to use a combination of sea mines and direct attacks on ships passing through the strait to truly close it.

“They would physically have to attack and maintain hold of that property. And everyone in the neighborhood is going to (try to) stop them,” Karasik said.

Reflecting unease over the rising tensions in the Middle East, the U.S. benchmark crude futures contract for February deliver was up above $101 per barrel in electronic trading on the New York Mercantile Exchange. Its London-based Brent counterpart fell slightly, but still remained above $109 per barrel on the ICE Futures exchange.

Saudi Arabia, the world’s largest oil producer, has been producing about 10 million barrels per day, leaving it with over 2 million barrels per day in spare capacity.

The oil rich kingdom is widely seen as the only producer able to offset production losses elsewhere. But others would have to also boost their output to accommodate a loss of exports from Iran, which is the world’s fourth largest oil producer.

Gulf Arab oil ministers, who met in Cairo on Dec. 24, declined to comment on whether they were eying alternative routes for oil in the case that Iran closes off the Strait of Hormuz. The ministers had gathered for a meeting of the Organization of Arab Petroleum Exporting Countries.

OPEC, of which both Iran and Saudi Arabia are members, agreed on Dec. 14 to set its output ceiling at about 30 million barrels per day — in line with the bloc’s current production. In the OAPEC meeting in Cairo days later, the ministers appeared comfortable with that level and said future moves would be determined based on demand and supply fundamentals in the market.

Sanctions targeting Iranian oil would hit Europe and Asia markets hardest. Crude from the country does not go to the United States because of existing sanctions.

The West maintains that Iran is pursuing nuclear weapons, a charge the country denies. Iran says its nuclear program is purely for peaceful purposes, such as generating electricity.

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Iran warned the West on Sunday any move to block its oil exports would more than double crude prices with devastating consequences on a fragile global economy.

“As soon as such an issue is raised seriously the oil price would soar to above $250 a barrel,” Foreign Ministry spokesman Ramin Mehmanparast said in a newspaper interview.

The comments come as Iran strives to contain international reaction to the storming of the British Embassy last week, a move that drew immediate condemnation from around the world and may galvanize support for tougher action against Tehran.

Washington and EU countries were already discussing measures to restrict oil exports after the United Nations nuclear watchdog issued a report in November with what it said was evidence that Tehran had worked on designing an atom bomb.

Iran says its nuclear program is entirely peaceful.

The U.S. Senate voted Thursday to penalize foreign financial institutions that do business with Iran’s central bank — which takes payment for the 2.6 million barrels Iran exports a day. The European Union is considering a ban — already in place in the United States — on Iranian oil imports.

So far neither Washington nor Brussels has finalized its move against the oil trade or the central bank amid fears of the possible impact on the global economy of restricting oil flows from the world’s fifth-biggest exporter.

But the British embassy attack dragged relations with Europe to a long-time low and Iran is now facing rising rhetoric about a direct hit on its main source of foreign earnings.

Until recently, Iran had dismissed as ineffective mounting sanctions aimed at forcing it to halt its nuclear activities. Mehmanparast’s comments show a more defensive stance.

“No one welcomes the sanctions, we know that sanctions create obstacles, but we want to say we will overcome these obstacles,” Mehmanparast told Sharq daily.

“Imposing sanctions on oil and gas is among the sanctions that, if one wants to do that, the consequences should be fully considered before taking any action,” Mehmanparast said. “I do not think the situation in the world and especially in the West today is prepared enough to raise such discussions.”

Britain’s Embassy in Tehran was ransacked Tuesday after London announced unilateral sanctions on Iran’s central bank. London evacuated staff, closed the embassy and the biggest EU states withdrew their ambassadors in protests.

Rising tensions were enough to push up crude prices with ICE Brent January crude up 95 cents Friday to settle at $109.94 a barrel.

Mehmanparast warned the EU Saturday to avoid tying itself to British interests.

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By Steve Hargreaves @CNNMoney

NEW YORK (CNNMoney) — When President Obama upped the ante last week in U.S efforts to isolate Iran, he also laid the groundwork for measures that could cut off Iranian oil exports and cause a spike in crude prices.

The U.S. government tightened restrictions on companies that provide Iran with equipment and expertise necessary to run its vast oil and chemical industry.

But it it also declared the entire Iranian banking system, including its central bank, a “threat.”

And that caused oil experts to take notice.

Iran conducts its 2.2 million barrel-a-day oil export business through its central bank, using it as an intermediary between the national oil company and its oil customers.

Declaring the bank a threat opens the door for the United States to impose sanctions on any company or government that deals with the bank, which would include companies from places like China, Japan and India that buy Iranian oil.

“It would force any country to chose between doing businesses with Iran and doing business with the United States,” said Robert McNally, head of the energy consultancy the Rapidan Group and a former adviser to President George W. Bush.

And that would be a direct attempt to cut off Iran’s oil exports.

Iran is the world’s third largest oil exporter behind Saudi Arabia and Russia, according to the U.S. Energy Information Agency. The Iranian government gets 50% of its revenues from its oil exports.

The country exports more oil than Libya, which is still mostly off the market. Most of the world’s remaining spare oil production capacity sits in Saudi Arabia, and the Saudis would be hard pressed to make up for another 2.2 million barrels a day.

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So curtailing Iran’s exports would have the likely effect of sending the price of oil higher.

But some experts question the impact even these new stricter sanctions will have on Iran’s ability to sell its oil.

Sanctioning companies that buy Iranian oil would hobble Iranian oil exports but not stop them all together, they say.

Oil is a fungible commodity, meaning that it’s possible to fill a tanker, ship it to different ports, sell the oil to different firms and have it end up on world markets with little trace of its origin.

“Iranian oil would still flow,” said Manouchehr Takin, an energy analyst at the Center for Global Energy Studies in London. But this process is harder and more expensive.

The administration is hoping that the threat of these sanctions, combined with all the other sanctions that have been announced over the years, will be enough to get the Iranian regime to reconsider its nuclear program or to force a division within the government leading to a new regime with more pro-Western policies.

The current Iranian government has been sparing with the West over its nuclear program for years. Iranian leaders contend the program is for peaceful purposes, but most Western governments think it’s designed to produce a bomb.

Plus, Iran’s current leader has called for Israel’s destruction.

But diffusing the situation has proven difficult. Many military analysts say a strike on Iran’s well-fortified nuclear facilities would only delay its program by a matter of months and risks rallying its citizens around the current government.

Iraq oil starting to come on strong

So the Obama administration “is trying to build more internal fissures that we can then leverage,” said Juan Zarate, also a member of the former Bush administration and now an analyst at the Center for Strategic and International Studies. “The financial noose will continue to tighten, and life will not get any easier for the Iranians.”

But the implementation of sanctions is no guarantee to bring about the social change the West desires, either. Too many sanctions, like those that restrict the supply of food, could solidify support for the regime inside the country and push it to become even more aggressive.

Then there’s the price of oil. What happens if the sanctions are too effective and Iran can’t get its oil to market?

The administration is “very, very worried about causing an oil price spike,” said Rapidan’s McNally. “That is their paramount concern.”

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With former Libyan leader Moammar Gadhafi ousted and dead, Libya’s interim government seems confident the country can reach pre-war oil production levels soon. But not everyone is so optimistic.

Before the February uprising, Libya put out about 1.6 million barrels of oil each day. That’s 2% of the world’s daily oil production.

The oil stopped flowing during the civil war as foreign companies left without properly shutting down the oil infrastructure. It is estimated Libya is now producing about 350,000 barrels of oil per day, but Libya’s new leaders are anxious to get more oil flowing.

Some oil companies that operated wells and refineries in Libya before the war “expressed some skepticism regarding a restoration of production to full pre-war levels within the next six months,” according to Fadel Gheit, managing director of oil and gas research at the Oppenheimer & Co. investment bank and firm.

“Obviously, the whole country is in shambles … civil war, total anarchy. Nobody is in control,” Gheit said. “So it’s not, obviously, a situation that will encourage oil companies to hurry back to Libya anytime soon.”

Gheit said because European oil companies left Libya so quickly during the uprising, they didn’t place the drills and refineries in a state that would make them easy to start up again. In some cases, wells will have to be re-drilled.

The new leaders of Libya will have to invest in the dilapidated oil infrastructure to maximize production and increase the nation’s revenue. But their limited funds are also needed to rebuild the country in the wake of intense fighting. If they spend too much on one, they may not be able to get the other done.

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