Growing U.S. Energy Supply Alters Political Debate: BGOV Insight

Ever since the 1973 Arab oil embargo, the U.S. has been obsessed with energy security, including the desire to rely less on foreign oil and produce as much as possible at home.

For just as long, the energy debate in presidential election years has been over the need to take better advantage of our own natural resources: extracting more oil, gas and coal, on the one hand, or promoting conservation along with alternatives such as solar and wind power.

Now the presidential election will be conducted against a different energy backdrop. Discoveries of shale deposits and the rise of new oil technologies have reshaped the U.S. energy marketplace. Big increases in renewable energy as well as domestic oil and natural gas production -- combined with the declining market share of coal -- change the terms of the old production-versus-conservation debate.

In its place, the next president will have to manage the economic vagaries and the potential environmental effects of the nation’s topsy-turvy energy supplies.

Thanks largely to a technology called hydraulic fracturing, or “fracking,” U.S. crude oil production increased almost 11 percent from 2006 to 2011, and is at its highest level since 1998.

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Cover image of the Sept. 3 Democratic National Convention edition of the Bloomberg Insider magazine

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Cover image of the Sept. 3 Democratic National Convention edition of the Bloomberg Insider magazine

The same goes for natural gas. A 25 percent increase in production over the past five years brought natural gas production to an all-time high, while prices dropped to almost their lowest point in a decade. The increase in renewables has also been large, though working from a much smaller base, growing almost 100 percent in five years.

Decisions by the next president will turn on the business and social impact of regulatory policy. What type of fracking regulations will the Environmental Protection Agency and Interior Department settle on? Will new EPA regulations for greenhouse-gas emissions and other pollutants continue to restrict the competitive position of coal-fired power? What will happen to the pace and scale of leasing and permitting on federal lands and waters? What about U.S. treatment of nuclear or renewables?

The emergence of hydraulic fracturing as a potent -- and hotly debated -- energy production technique illustrates the kind of challenges to come.

Just a few years ago, most industry observers expected domestic oil and natural gas production to continue falling. Fracking, a process by which high pressure fluids are injected underground to free oil and gas deposits from tiny pockets, has opened up vast reserves of shale natural gas and “tight” crude oil that were previously considered too costly to produce.

In North Dakota, for example, the results of fracking have been staggering. Oil production has risen more than 400 percent in the past five years; the state has overtaken Alaska to become the second-largest oil producing state behind Texas.

Fracking doesn’t come without controversy. There are concerns about the impact the drilling process may have on local water and air quality. A recent study by researchers at Duke University found evidence that drilling in Pennsylvania may have contaminated drinking water supplies.

Most aspects of hydraulic fracturing are regulated at the state level, but there’s pressure for the federal government to get involved. The EPA’s recent regulations aimed at fracking -- and the expectation of more to come -- may increase production costs and slow the development of domestic oil and natural gas.

In April, the EPA issued its first regulation aimed at the roughly 13,000 wells that are “fracked” each year. The rule requires exploration companies to conduct “green completions” to reduce emissions from their oil- and gas-extraction sites. The EPA and the industry hold differing views of what this will mean to the economics of fracking. EPA says the rule won’t cost the industry a cent; the industry says it will suffer $2.5 billion a year in added costs.

In its own study, Bloomberg Government concluded that both the EPA and the industry miss the mark. It found the regulation will cost the industry from $316 million to $511 million a year -- not nothing, but also less than 1 percent of revenues associated with oil and gas production.

EPA’s fracking regulation alone should be easily surmounted by the industry. Still, it raises questions about the next round of rulemaking. EPA is currently studying fracking’s impact on drinking water, which may increase pressure to develop new federal regulations using the Clean Water Act.

This doesn’t mean there’s a binary choice between stringent regulation and no regulation. It does suggest the next president will influence the scope, scale and timing of energy independence.

(Rob Barnett is an energy analyst and Tony Costello the lead analyst with Bloomberg Government. The views expressed are their own.)

To contact the analysts: Rob Barnett in Washington at rbarnett12@bloomberg.net; Anthony Costello in Washington at acostello4@bloomberg.net

To contact the editor responsible: David Rapp at drapp5@bloomberg.net

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