Issue 22: 2012

Energy Independence at Last?

There are renewed calls — and fresh reasons — for America to produce all of its fuel. Here’s how U.S. Trust’s energy professionals think it could happen.

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Every president from Richard Nixon on has called for the United States to become energy self-reliant ? and yet the nation still imports more than a quarter of its energy, mostly as oil. Why is that? Well, it could be that energy independence is no more than a pipe dream. Or perhaps it?s just that conditions have never been right. Until now.

Import-Free?

?Energy independence may have been an unrealistic goal in the past,? says Dennis Moon, national executive of the Specialty Asset Management (SAM) group at U.S. Trust. ?But a number of powerful catalysts have come to prominence in the past decade, and together they make self-reliance seem far more likely ? perhaps even inevitable ? in the years ahead.? Moon highlights three of these catalysts.

1. Technological improvements. ?Thanks to new tools such as horizontal drilling and 3-D seismic mapping, vast deposits of oil and natural gas are discoverable and recoverable. In transportation, the newer hybrid cars can cover 40 miles or more on one gallon of gasoline. In the renewable energy sector, solar panels are generally cheaper and more effective today.?

U.S. Energy Stats In Quadrillion Btu (QBtu) Click to expand

2. Political motivation. ?There?s a new push to phase out oil imports because the supply chain has recently grown particularly unreliable. The Arab uprisings and Iran?s nuclear ambitions have raised tensions in the oil-rich Middle East. The Organization of Petroleum Exporting Countries (OPEC), a major supplier, has instituted more supply and price controls.1 (Mexico and Canada, by contrast, are not only stable suppliers, they?re also geographically close; we therefore count North American oil imports, for now at least, as part of the U.S. self-reliance equation.) There?s also growing concern about the rise in global competition for energy as emerging markets like China expand their middle classes.? (For more on U.S. energy sources and uses, see Figure 1: U.S. Energy Flow 2011.)

3. Climate change. ?Evidence supporting the effect of carbon emissions on weather patterns has been mounting. In response the White House has provided subsidies for low- and zero-emissions energy alternatives like wind and solar, and a long list of corporations are focusing on lowering their energy consumption and carbon footprint. This is all good news for energy independence.?

With these and other catalysts in place, the United States may well be closer to unplugging from outside energy sources than at any point in its recent history. (The International Energy Agency said in a recent report that U.S. energy independence could occur by 2035.) What might it take to close the deal?

Almost Everything

?We take a broad-based approach to self-reliance,? says Dick Sadler, national executive of SAM?s Oil and Gas group. ?If the United States is to secure a truly lasting independence from energy suppliers outside of North America, there must be progress on many fronts, from natural gas to wind power and almost everything in between. Not every energy professional agrees with this broad view. Some think the key is to expand the use of natural gas for buses and delivery trucks. For others the answer is to extend the Keystone Pipeline. These individual steps are important. But we believe that for real long-term independence the country needs a wide range of options.? Those options include the following:

Figure 1: U.S. Energy Flow 2011 Click to expand

Natural gas. ?We think natural gas will be a cornerstone of the nation?s energy independence program ? and for fairly obvious reasons,? says Bob Maxwell of the Oil and Gas group. ?There is enough of the hydrocarbon to last a century, by some estimates. At today?s prices, it?s usually cheaper than oil. And natural gas burns more cleanly than coal.? (See Figure 2: Fossil Fuel Emission Levels.)

Oil. Recovery of oil from conventional deposits as well as unconventional sources like shale should continue, Maxwell says. ?The government should consider opening up more federal land for exploration and drilling.?

Coal. Coal is used to produce about a fifth of the total energy America consumes, mostly in the form of electricity. ?The development of so-called clean-coal technologies such as carbon capture should be expanded,? says Sadler.

Figure 2: Fossil Fuel Emission Levels Click to expand

Transport. ?We believe the use of natural gas in fleet transportation and, especially, in automobiles, is important and should be expanded,? Maxwell says. ?A major barrier to this expansion is the supply infrastructure ? there just aren?t enough places for vehicles to fill up. We think the government should promote investment in the delivery infrastructure.?

Power plants. ?New electricity-generating power plants should be designed to burn natural gas, and old coal-fired plants should be converted to use it, in our view,? Maxwell says. ?Not only does methane burn cleaner than coal, it also produces cheaper electricity.? The U.S. Energy Information Administration (EIA) estimates that a kilowatt of electricity can cost about three times more to produce in a conventional coal-fired plant than it does at a modern natural-gas-fired plant.2

Shale. Shale deposits like Marcellus Shale and the Bakken Formation could eventually produce 750 trillion cubic feet of natural gas and 24 billion barrels of oil, the EIA estimates. ?Shale is an indispensable part of any long-term energy independence plan,? Sadler says. ?The government will probably need to open up more federal land for shale development.?

Hydraulic fracturing. As the main technique for hydrocarbon recovery from shale, ?fracking? is criticized because chemicals used in the process have reportedly been found in groundwater. Says Maxwell: ?We anticipate that the industry will continue to make the process safer for the environment.? Notably, a Canadian company is reportedly developing a technique called liquid pulse that uses few if any chemicals.3

The United States may well be closer to unplugging from outside energy sources than at any point in its recent history.

Nuclear. The United States gets a fifth of its electricity (and about 8% of its overall energy supply) from about 100 nuclear reactors today4 ? but on the heels of the Japanese nuclear disaster, the future contribution from this power source is less certain. ?We think it will be difficult to garner public support for many new nuclear-powered plants here because the environmental and health consequences of an accident are so potentially disastrous,? Maxwell says.

PLAINPICTURE/OJO
Energy Independence and Investment Opportunities Click to expand

Renewables. Wind turbine farms and solar panel arrays, along with hydroelectric dams, produce about a tenth of the nation?s electricity. ?We would like to see greater use of renewables, because once in position they produce essentially zero emissions,? says Maxwell. ?We hope wind and solar do not lose their appeal amid the glut of cheap and plentiful natural gas.?

Batteries. ?Electricity generated by the wind and sun is subject to changing weather conditions and cannot be stored, except in the grid,? says Moon. ?Batteries capable of storing many megawatts are under development and should in time help make these alternative energy sources more viable.?

Biofuels. ?Ethanol is already used as an oxygenator in, and is a viable alternative to, gasoline. The price of corn, the primary source for the manufacture of ethanol, has been rising lately (blame global competition for food and recent droughts). Some ethanol plants can use cheaper alternatives to corn, such as milo [grain sorghum], and we?d like to see more plants with that capability,? says John Taylor, head of SAM?s Farm and Ranch group. ?Eventually many types of biomass could be used in the production of alternative fuels.?

End in sight? ?The effort to reduce and ultimately end America?s purchase of foreign oil is four decades old,? Moon says. ?That said, we think the country may actually be closing in on self-reliance. We believe a broad-based approach to energy creation and conservation is the way to go. We also think many companies stand to benefit from this vast undertaking.? (See ?Energy Independence and Investment Opportunities.?) Clients wishing to learn more about investing in U.S. energy independence should contact their U.S. Trust advisors.

1 ?U.S. Imports of Crude Oil?: OPEC: 144 million barrels; non-OPEC nations: 200 million barrels. U.S. Energy Information Administration (EIA), May 2012.
2 ?Updated Capital Cost Estimates for Electricity Generation Plans,? EIA, November 2010.
3 ?Liquid Pulsing: Fracking Alternative?? Discovery News, August 24, 2012.
4 ?U.S. Electricity generation by Source, 2009.? EIA, April 2010.

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