Economy, Regs, & Taxes

The American Energy Boom

The U.S. now leads the world in proven oil reserves.

Paul Albaugh · Mar. 14, 2017

For years, we’ve heard numerous politicians declare that we need to reduce our dependence on foreign oil, particularly from the Middle East, and that we need to become energy independent. We’ve also heard that we need to completely cease use of fossil fuels. Arguments include eventually running out of oil, the danger of over-reliance on other countries to fuel our economy and that fossil fuels cause climate change.

We were told, primarily during the years of the previous administration, that the United States must lead the way to seek out and develop alternative sources of energy — “green” energy — such as wind and solar in order to prevent mankind from destroying ourselves via the excessive use of fossil fuels.

On paper these ideas of alternative sources sound fantastic, and perhaps in the decades to come they will be consistent and more affordable. But for now, oil, is still the cheapest, most reliable form of energy, and U.S. energy policy should reflect that reality.

In the summer of 2016, Rystad Energy, an oil consulting firm, released new data revealing that the United States has more oil reserves at an estimated 264 billion barrels than any other country in the world. This, for the first time in history, surpasses Russia at 256 billion barrels and Saudi Arabia at 212 billion barrels.

If we have so much of our own oil, it seems reasonable to ask, why are we still relying on the Middle East to provide this valuable resource? The short answer is that we only have approximately 22 billion barrels of proven reserves — that is, we only have the ability to tap into 22 billion barrels of oil due to technological limitations and regulations. The cost of extraction is another factor in calculating proven reserves, which is why “cheap oil” effectively reduces these reserves — cost exceeds profitability when oil is cheap.

Several years ago, oil production in the U.S. increased substantially with the use of new extraction technology. Hydrologic fracturing, or “fracking,” was the new means of production and Pennsylvania, North Dakota and Texas saw the largest increases in oil (and natural gas) production.

This new availability of oil posed a significant threat to the U.S.’s previous primary supplier of oil, Saudi Arabia. Before this expansion in extraction, the price for a barrel of oil was $115. Once the 21st Century American boom began, the Saudis, in an attempt to drive American innovators out of the oil business, lowered the price per barrel to $30, gambling their economy on the hopes that U.S. oil companies would run out of cash and close up shop, thereby forcing continued American reliance upon Saudi Arabian oil.

Their plan didn’t quite work. In fact, the Saudi economy is declining. “The International Monetary Fund in January slashed its forecast for Saudi economic growth this year to 0.4 percent from 2 percent,” Bloomberg reports. “Net foreign assets, though still above $500 billion, are shrinking as the government uses savings to plug a budget deficit that reached $79 billion last year — $107 billion if delayed payments to contractors are included.”

What does all of this mean and why does it matter?

First, Saudi Arabia’s declining economy has weakened its strategic position in the Arab world, and that, combined with Barack Obama boosting Iran’s influence, has fueled instability in the Middle East.

Second, the U.S., because of the technological advances resulting in more American oil production, has transitioned from being a net oil importer to a net exporter of oil. In fact, the biggest onshore oil discovery in 30 years was just announced in Alaska. This, of course, is welcome news with its lower consumer fuel prices and more American jobs.

Finally, as we look forward, President Donald Trump’s administration has the opportunity to create sound energy policy. We should continue striving toward energy independence, but do so without paralyzing other economies in the world. Furthermore, the largest driver of cost in the energy sector is regulation. The Trump administration should push for deregulation across the board for those businesses who are seeking new, better and safer ways to tap into America’s vast resources. Unleashing the power of competition amongst American businesses and workers is what will drive success in the energy sector.

Our nation has a bright future when it comes to energy. The key is going to be harnessing that energy through the free market.

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