America must take steps now to sustain its energy dominance
In recent weeks, global energy markets have been whipsawed. Reacting to a “triple whammy” of suppressed demand from the coronavirus-induced economic freeze, an oversupply of about 10 million barrels per day on the world market, and a price war between Saudi Arabia and Russia, oil prices have plummeted from around $60 per barrel to less than $20 at times. Pain has been especially acute in the U.S. oil patch where both majors and independents, along with oil field service companies, have fired or furloughed thousands of employees. In the Permian Basin of West Texas, the rig count is down and bankruptcies are up. Every exploration and production company is trimming its capital budget, while lease sales have come to a virtual halt.
Does this mean the end of U.S. energy dominance? Will the shale revolution that has made us the world’s No. 1 oil- and gas-producing country grind to a halt? Will we revert to becoming a net energy importer instead of a net exporter? Let’s hope not. But in the face of economic and political uncertainties, a number of initiatives and policy changes today could help sustain our energy industry and keep us globally competitive tomorrow.
First, President Trump and others must convince Saudi Arabia and Russia that they’re playing a negative-sum game in which everyone — including America — loses. Yes, both countries have sizable financial reserves that can cushion the blow from low oil prices. But those resources would be better allocated to diversifying their economies.
Here at home, we need to think long term. Oil and gas aren’t going away, at least for the next 50 to 60 years. Once the global economy starts to recover from the coronavirus, the demand for energy will grow quickly. To ensure America is able to meet that growing demand we should use this downtime to improve the infrastructure for transporting and processing our oil and gas resources. For example, in recent years serious mid-stream bottlenecks have occurred in the Permian because of a lack of pipeline takeaway capacity.
Similarly, as production of natural gas has surged in the Marcellus and Utica shales of the Northeast, investment in pipeline infrastructure has lagged. Consequently, Marcellus gas sells at up to a 50 percent discount to the national benchmark at Henry Hub while New England relies heavily on imported liquefied natural gas (LNG), sometimes from Russia. Expediting the issuance of state and federal construction permits can help unclog these chokepoints.
The same is true for LNG facilities and export terminals. LNG demand is projected to reach 500 million tons per year within a decade, with Asia the leading customer. This means permitting and building additional LNG trains and related infrastructure so U.S. producers can capture a substantial share of that market. Here again, regulations should be streamlined to expedite the construction of these facilities.
Revising the Jones Act can also help America’s energy producers and consumers. This law, which has been around for 100 years, requires that all goods shipped between U.S. ports must be transported on ships that are built in the U.S., owned by U.S. companies, and operated by U.S. citizens or permanent residents under the U.S. flag. However, the average cost of operating a U.S.-flagged vessel is almost three times greater than a foreign-flagged vessel.
What’s more, there are no LNG carriers compliant with the Jones Act. Thus, consumers in the Northeast can’t import abundant and inexpensive gas in liquefied form from ports in the Gulf of Mexico. Moving oil is another expensive logistical nightmare for domestic producers since it’s actually cheaper to ship oil to northeastern ports from Nigeria and Saudi Arabia than from the Gulf Coast.
Contrary to some popular commentary, the current coronavirus-related energy debacle does not signal the end of the fossil fuel era. The global economy will recover, as will the demand for oil and gas. That’s why it’s important to take steps today to retain America’s No. 1 position in the future.
Bernard L. Weinstein is associate director of the Maguire Energy Institute and adjunct professor of business economics in the Cox School of Business at Southern Methodist University.
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