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The shale energy revolution has turned the U.S. into an energy powerhouse.
Once considered a source of vulnerability to America’s superpower status, oil and gas production has now become the very foundation of the country’s economic strength.
This remarkable transformation was not the product of smart government policy and foresight, but rather the determination and ingenuity of risktakers like the legendary Texas oilman George Mitchell, who first cracked the shale gas code, and “petropreneur” Harold Hamm, who jump-started oil production from the Bakken shale in North Dakota.
This surge in oil and natural gas production was an unexpected economic gift when the country, in the midst of the Great Recession, needed it most.
Washington can’t claim credit for the shale boom, but does have the opportunity to craft policies that will make the most of it. But where to begin? Here are three recommendations:
• 1. Don’t get in the way: Just five years ago experts believed the U.S. was poised to rival Japan as the world’s largest importer of natural gas. Companies spent billions of dollars constructing liquefied natural gas (LNG) import terminals. Now those terminals are being converted to export facilities to take advantage of America’s natural gas bonanza at the same time that domestic crude oil output grew by more than a million barrels per day in 2012, the largest one-year increase in U.S. history.
Yet instead of advancing this extraordinary change of fortune, the Obama administration continues to call for raising taxes on the oil and gas industry and imposing new and unnecessary federal regulations on energy production.
Higher taxes and a burdensome regulatory regime could put a damper on investment in domestic energy development and stop the shale boom in its tracks.
It would be wise for Washington to remember the old adage: If it ain’t broke, don’t fix it.
• 2. Speed up LNG export approvals: The Obama administration has given four companies approval to construct LNG export terminals and sell natural gas to countries that have not entered into a free-trade agreement with the U.S. These approvals are an encouraging first step, but more than a dozen other applications await review.
The Department of Energy should speed up approvals and let the market dictate which of these projects will be economically viable.
And putting any arbitrary government caps on the volume of U.S. exports would be a big mistake. Exporting a small percentage of our abundant natural gas production will encourage new domestic energy development, which will moderate any upward pressure on prices that could result from gas exports.
More importantly, gas exports are shaping up to be invaluable geopolitically as key allies and major LNG buyers, such as Japan, India and South Korea, are being pulled closer, while reducing the influence of other major gas exporters like Russia and Iran.
• 3. Encourage use of natural gas as a transportation fuel: While domestic production of oil is surging and imports are falling, we still remain vulnerable to oil price spikes caused by turmoil in unstable regions of the world.
Oil currently supplies 93% of the fuel for our energy transportation needs, and increasing transportation fuel diversity is critical to further improving our energy security.
The Renewable Fuel Standard, which mandates the blending of ever-increasing amounts of ethanol into the nation’s gasoline, was a misguided attempt at addressing this challenge.
Forty percent of the nation’s corn crop is now going to ethanol production, which has resulted in higher food prices and a massive taxpayer handout to corn farmers and ethanol producers with little benefit to energy security.
A better strategy would be to encourage greater use of the nation’s abundant supply of natural gas for transportation.
Trucks and buses are already being converted to run on compressed natural gas (CNG), which costs the energy equivalent of about $1.50 per gallon, a big savings from gasoline.
General Motors recently announced that it’s going to start manufacturing a car model boasting a flex fuel engine that can run on either CNG or gasoline, and this is hopefully a harbinger of what’s to come.
Smart energy policy would encourage more of this fuel diversification.
Instead of mandating use of an inferior fuel, as was done with ethanol, a better policy might be to offer tax incentives to consumers who buy flex-fuel vehicles.
The U.S. has long operated with a mindset of energy scarcity and the threat of increasing dependence on OPEC.
But now that we have plentiful supplies of oil and natural gas, it’s time for an energy policy that reflects a new era of energy abundance.
If we’re smart — and perhaps that’s asking too much of the Obama administration — we will adopt policies that encourage increased oil and natural gas production, allow us to move away from failed mandates such as the Renewable Fuel Standard, and use our energy resources as a potent geopolitical tool.
– Perry is a scholar at The American Enterprise Institute and professor of economics at the University of Michigan-Flint School of Management.
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