NATURAL GAS

Decades on, OPEC embargo molds challenging energy debates

Forty years after the 1973 oil embargo crippled the U.S. economy, today's domestic oil production and abundance of natural gas from shale deposits are nudging the legacy of energy shortage further into the recesses of memory.

But even as the surge of U.S. oil and gas production and the technology behind it tell a new energy story, the conversation around natural gas, as much as oil, remains heavily influenced by the events of 40 years ago.

"The American society at that time was complacent; there was not public recognition that the United States had to import any oil at all, in 1973," said James Schlesinger, then the secretary of Defense, who later went on to become the first Energy secretary when the Department of Energy was formed several years later.

Speaking at an event Tuesday hosted by the U.S. Energy Security Council, Schlesinger reminisced that at the time, "The public was not aware that the United States was dependent upon foreign sources of oil. And as a result, when the shortages began after the embargo set in, the public blamed the oil companies. ... It took many years before the public really understood that we were dependent and increasingly dependent upon that imported oil."

Americans did, eventually, internalize that message of energy scarcity, especially in the transportation sector, where they saw gasoline pump prices rise and fall with decisionmaking by the Organization of the Petroleum Exporting Countries and world events.

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Natural gas prices, too, swung fast over the ensuing decades, in part due to U.S. production and regulatory issues. But it is in transportation -- where the United States remains dependent on oil for 97 percent of its energy needs -- that the vulnerability to forces outside of U.S. control is most keenly felt.

"Energy independence ... is an incantation that the public loves," Schlesinger said. "If you don't say energy independence, you are not going to get the public response that you want. So all we've heard about is energy independence."

Despite the rhetoric around energy independence, Schlesinger and other observers say energy security is a more realistic goal, reflecting the global nature of global oil flows and the numerous interconnections that make regional markets like North America function as well as they do.

On the natural gas front, policymakers until recently were predicting the sort of shortages in domestic production, and increasing reliance on imports, that were familiar from the oil world.

As late as January 2007, the Energy Information Administration forecast in its short-term energy outlook that U.S. liquefied natural gas imports would increase through 2008. The discussion was around how U.S. buyers would compete with less price-sensitive markets in Europe and Asia.

The speed with which the shale gas boom has turned that line of thinking upside-down -- to the extent that DOE now has a queue of some two dozen projects seeking LNG export licenses -- is a testament to the confidence that the natural gas community has in what now looks like a vast domestic resource.

But while the exploitation of shale oil deposits plugs into a simple storyline that leads straight to statements of America's forthcoming energy independence, however tenuous that is, the natural gas turnaround is proving slower to sink in.

Natural gas exports -- a security challenge?

Within energy circles, many observers today talk about the opportunities surrounding natural gas as once-in-a-lifetime changes in the world energy order. In certain scenarios, gas replaces large volumes of coal used in the electric power sector and chips away at oil's dominance as the fuel for cars and trucks.

In a September speech at the 5th World LNG Series in Singapore, Richard Westerdale, who directs the State Department's policy analysis and public diplomacy efforts at its Bureau of Energy Resources, described those changes as laying the groundwork for U.S. policy goals around the world.

"Due to the rapid development of hydrocarbon resources in the U.S., we have the opportunity to support economic development, foster greater competition in the global marketplace, and strengthen political stability in both producing and consuming countries while still addressing environmental concerns and transitioning to cleaner fuels," Westerdale said.

"With the right policies, we can change the way that gas is used in the future," he added. "We can enhance the stability and depth of gas markets in a way that subjects those markets to fair and transparent competition that we have not always seen in the past. ... The benefits will be enormous economically and environmentally."

Other stakeholders underline how U.S. gas resources can enhance the strategic positions of American allies and improve the nation's balance of trade. If cost-effective, practical means can be found to use natural gas at a large scale in the transportation sector, it could even eat into the dominance that oil exerts over that central aspect of the U.S. economy.

But public discussion of natural gas has so far lagged that insider opinion, reflecting a theme of scarcity more than one of abundance.

At DOE, policy development around natural gas exports has focused to a large extent on whether shipping LNG to foreign buyers would hurt availability of the fuel at home.

In December of last year, a long-awaited study commissioned by DOE described global energy modeling designed to assess how LNG exports might affect domestic prices. The conclusion, explored through a series of supply growth and demand scenarios, was that domestic natural gas prices would rise modestly to moderately, depending on how the U.S. export market evolved, but that under no circumstances would buyers in the United States face the same prices as those in resource-constrained countries overseas (EnergyWire, Dec. 5, 2012).

DOE's direct study of the economic impacts that could come from growing the natural gas market has helped to quell objections from some U.S. industrial critics that gas exports would make the fuel less available for domestic needs like manufacturing.

America's Energy Advantage -- a group that includes companies like Dow Chemical Co., the American Public Gas Association, aluminum manufacturer Alcoa Inc., Eastman Chemical Co., materials company Celanese Corp. and steelmaker Nucor Corp. -- argues that shipping too much natural gas overseas could lead to price volatility and shortages at home, hurting the competitiveness of energy-intensive industries and those that rely on natural gas as a chemical feedstock.

The DOE study acknowledged that companies with those cost structures could be harmed by exports, but said that in general, short-term domestic shortages would be met with increased natural gas production from the extensive and widespread resources available.

In the public eye, the shale gas boom is associated more with environmental controversies surrounding hydraulic fracturing, or fracking, to retrieve the gas than it is with any shift in domestic energy security. Advocacy campaigns around shale gas typically portray it as yet another fossil fuel that comes with troubling environmental baggage; the energy community's perspective on how it could shape the U.S. role on the world stage has not made inroads.

Some pro-development groups, like the Energy Security Leadership Council -- a group of individuals with heavy representation from military and Fortune 500 companies that advocates for solutions to the national dependence on oil -- argue that the public can be brought on board with shale gas development by addressing fracking concerns head-on, freeing shale gas to play a more central role in the country's energy future.

In a recent policy update, the group recommended that states should participate in a centralized oil and natural gas regulation review process that encompasses best practices for fracking.

Addressing the issue head-on, they said practices geared "to ensure that the local environment is protected and substandard producers are held accountable for their shortcomings" could lead to a simpler overall regulatory environment and greater natural gas production. "The Council is concerned that any erosion in public confidence regarding environmental contamination from hydraulic fracturing will lead regulators to restrict access to the resource," the group warned.

To boosters like the State Department's Westerdale, the debate over fracking can be seen as a sign of the long-term viability of the U.S. natural gas boom and, by extension, a boon for national energy security.

"In developing our shale gas resources, we in the U.S. have seen the importance of openly discussing the environmental impacts of development, including air and water quality, seismic impacts and methane emissions," Westerdale told the international audience in Singapore last month. "These lessons learned have positioned the U.S. not just for today, but also for the future."

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