Economist: Energy industry faces opportunities and threats

John Felmy
John Felmy

Phil Castle, The Business Times

Even after studying the energy industry for 40 years, John Felmy remains surprised by innovations that could make the United States the top producer in the world.

“It’s a really exciting time. I never dreamed this was possible,” said Felmy, chief economist for the American Petroleum Institute.

A combination of hydraulic fracturing and horizontal drilling has extracted more natural gas and oil from tight rock formations onshore even as deep water drilling has tapped large reserves offshore. Increased exploration and development has made the U.S. the top natural gas producer in the world. And the country ultimately could surpass Saudi Arabia as the top oil producer, Felmy said.

That prospect could be affected, though, by energy policies that restrict access to resources and impose additional taxes and excessive regulation, Felmy said.

A ban on hydraulic fracturing like the one proposed for Colorado would have dramatic effects on production and, ultimately, the cost of driving automobiles and heating homes, he added.

“We have opportunities. But we have threats at the national and local levels,” he said.

In his presentation at the Energy  Forum & Expo in Grand Junction and an interview with the Business Times, Felmy outlined those opportunities and threats.

The implications are significant, he said, because the energy industry accounts directly and indirectly for about 10 million jobs. Millions more people own shares in publicly traded energy companies.

While such renewable energy sources as solar and wind are needed to help meet demand, they’re unlikely to ever supplant fossil fuels, particularly in powering transportation, he added.

Despite repeated predictions over the past 50 years oil and natural gas resources would run out, production actually has increased as a result of technological advances, Felmy said. Hydraulic fracturing, horizontal drilling and the ability to extract oil from deep water locations and Canadian oil sands have bolstered prospects North America will achieve energy self-sufficiency.

Increasing domestic oil production in the U.S. has eclipsed foreign imports, resulting in a $56 billion reduction in the trade deficit, Felmy said. Every $1 billion decrease in the trade deficit equates to about 5,000 additional jobs, he added.

In fact, the U.S. soon could export oil and natural gas, Felmy said.

There’s a mismatch between the light crude oil extracted in the U.S. and heavy imported crude oil refineries turn into gasoline and other products. That creates an opportunity to export the higher-priced light crude and import the less expensive heavy crude, he said.

There also are opportunities to export natural gas if additional facilities are constructed to liquefy that gas for shipment to overseas markets, he added.

Even as the energy industry enjoys increased oil and natural gas production and the potential for exports, the industry also faces threats, Felmy said. “It’s something we can certainly mess up.”

Those threats include restrictions that limit access to resources on federal lands and offshore and increased taxes and regulations.

In Colorado, proposed ballot measures that would restrict and even ban hydraulic fracturing in oil and gas production are especially worrisome, Felmy said.

They’re also unnecessary, he said. “Fracking has never been demonstrated to cause a problem.”

Hydraulic fracturing, or fracking, is a process in which water, sand and chemicals are injected at high pressure to fracture underground rock formations to increase oil and natural gas production. Felmy attributed most of the increased production in the United States to the combination of fracking and horizontal drilling.

Discontinuing fracking would have dramatic effects, he said, including what’s estimated would be a $1,200 annual increase to homeowners in the cost of natural gas and electricity.

Moreover, fracking bans likely would push energy development elsewhere, whether that’s outside of Colorado or outside the United States, Felmy said. “The rigs can move.”

That makes it important to base energy policies on facts, rather than myths or wishful thinking, he said.