Economist: Growing production could contribute to self-sufficiency

Phil Castle, The Business Times:

John Felmy

While low prices pose a short-term challenge to production, natural gas remains an important long-term component of what John Felmy describes as an all-of-the-above approach to meeting future energy needs. There’s a possibility, in fact, North America could become self-sufficient by 2024.

But even as technological advances have substantially increased potential supplies of natural gas and oil, increasing federal regulations threaten those supplies, says Felmy, chief economist for the American Petroleum Institute. “We’re at a crossroads right now with energy policy.”

Felmy discussed a wide range of energy issues both during his presentation at the Energy Expo & Forum in Grand Junction and in a lengthy interview with the Business Times.

Felmy started with rising gasoline prices, which he attributed to rising crude oil prices that account for about 76 percent of what consumers spend at the pump. Oil prices have climbed, he says, as a result of increasing global demand, particularly in China and India.

While oil prices fluctuate on a day-to-day basis on rumors, perceived threats and speculation, long-term trends reflect the economic basics of supply and demand, Felmy says. Otherwise, oil inventories would accumulate, he says. And that’s not happening.

Demand for crude oil has remained soft in the U.S. in the aftermath of a recession and a recovery that remains less robust than what many believe, Felmy says. “I’d caution people about how good the economy is.”

Even as oil prices have increased, natural gas prices have decreased, Felmy says, in large part because of growing supplies and weak demand.

The growing price gap between oil and natural gas prices poses a challenge in the short-term to natural gas production, he says, as exploration and production companies shift resources to oil.

The long-term prospects for increased natural gas production remain bright, however, Felmy says.

More natural gas likely will be used to fuel power plants. Natural gas also offers an alternative to gasoline and diesel as a transportation fuel, although there’s a chicken-and-egg dilemma over which should come first: more natural gas-powered vehicles or the infrastructure needed to fuel them.

Increased supplies of natural gas combined with the technology to liquefy that gas could make exporting a possibility, Felmy says. Liquid natural gas facilities under construction at U.S. ports to process what was envisioned as imports could be used instead for exports, he adds.

That’s not to mention the use of increased natural gas to manufacture plastics and chemicals, he says.

Energy production relies on some of the most advanced technology used by any industry, Felmy says. Such advances as hydraulic fracturing and horizontal drilling have substantially increased production of oil and natural gas from shale formations and other unconventional plays. “It really is exciting to see what is happening.”

Given increased production of domestic oil and natural gas as well as biofuels in the U.S. — along with increased oil imports from Canada — there’s a possibility North America could become self-sufficient by 2024. Felmy says.

There’s also potential for oil shale, which has yet to be developed on an economical basis, but offers a “vast resource,” Felmy says.

Realizing self-sufficiency depends, though, on federal energy policy, he adds. “We have to have the political will to do it.”

Canada — not Saudi Arabia — constitutes the biggest source of imported oil for the United States, he says. The relationship is doubly beneficial because 90 cents of every dollar spent on Canadian oil comes back to the U.S. through trade. The ratio for oil purchased from the Middle East falls to 30 cents.

Yet, President Barack Obama has delayed construction of the full length of a  pipeline that would transport oil from Canadian oil sands to U.S. refineries — a decision Felmy decries as a mistake.

While the Barack Obama administration might want to claim credit for promoting increased domestic energy production, the industry has expanded production despite federal policies, not because of them, Felmy says. And increasing federal regulations and their associated costs threaten continued increases in production, he says.

No less than eight federal agencies are exploring the possibility of imposing regulations on hydraulic fracturing even though there’s never been an instance of fracking contaminating groundwater, Felmy says. An outright ban on fracking could prove “disastrous” for the industry, he adds.

States, including Colorado, already do a good job of regulating energy production, he says. “There is no need for more regulations, certainly not more federal regulations.”

At the same time, some politicians support an end to what they call “subsidies” for oil companies that Felmy terms “tax treatments” for an industry that already pays more in taxes and royalties than other industries.

What is needed, Felmy says, is an all-of-the-above policy that encourages the development of all potential energy sources — traditional and renewable. “We’re going to need a little bit of everything.”

Nonetheless, it makes no sense to focus on renewable energy sources that supply only a small fraction of the overall energy needs of the country when oil and natural gas will be needed for the foreseeable future. “We can’t continue to focus on 1 percent solutions.”