Are We There Yet? The US And Energy Self Sufficiency

AppId is over the quota
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I recently covered BP's (British Petroleum) Energy Outlook for 2030, as some of you may remember, and I wanted to go deeper into one prediction that potentially has a significant impact on Americans - that:

a growing supply of biofuels and unconventional oil and gas will turn North America's energy deficit into a small surplus.

BP broadly talks about North America, but I'm going to focus on the U.S. simply because our population is almost nine times that of Canada.

There is always talk and media coverage, on whether we will achieve energy self-sufficiency by expanding drilling within protected areas on the mainland and offshore. This talk typically gets amplified around election time when each party goes out of its way to cater to its own interest groups.

In order to clear through the rhetoric, let's fill in the background. Americans account for about 4.4% of the world's 7 billion population but consume about 26% of the world's energy. Yet we only have about 3% of the world's oil economically extractable reserves, making energy self sufficiency seem like an impossible goal. Today, we receive 84% of our energy from fossil fuels - coal, oil and natural gas, and the remaining 16% from hydro, nuclear and renewables such as solar and wind energy. Increasingly, the U.S. is focusing on bio-fuels by dedicating ever larger tracts of corn fields to the production of ethanol. In parallel, there is a strong move in the U.S. towards environmentally friendly construction, transportation, urban design and energy efficient appliances, which together are reducing our collective environmental impact. The government is providing loan guarantees, bio-fuel subsidies, tax incentives and so forth to make us more energy efficient.

But also get this: North America is home to an incredible abundance of hydrocarbons trapped in hard- to- reach offshore and on-land formations such as shale rock and oil sands - far more than any other part of the world. Estimates suggest that the U.S. has 2 trillion barrels of this hard-to-get fuel and Canada has 2.4 trillion barrels - well above the Middle East and North Africa's $1.2 trillion of conventional oil reserves. The good news is that technology innovation is now making it economically viable to extract this stuff at an ever increasing rate-using techniques such as horizontal drilling to increase natural gas production in the U.S. from virtually zero to meeting 20% of our needs today. Where we once fretted about not having enough natural gas, we are now worried about finding potential buyers for this stuff. It's a great problem to have!

A lot of this innovation has been spurred by record-high oil prices over the past decade. If we do succeed in reducing our dependence on foreign energy, the heavy-handed oil driven diplomacy of producing nations such as Iran, Russia and Venezuela will receive a body blow from our own increases in production, innovation and energy efficiency. Also, other virtues and benefits emerge from this abundance. The U.S. could strategically help friendly nations extract their own reserves and reduce their dependency on foreign oil creating a virtuous cycle for the good guys. What this means is the U.S. could, once again, take the lead on energy production and change our history going forward.

If in fact, all of this plays out, the price of oil could drop significantly, increase corporate profits, spur further innovation and lead our innovative companies' back into a newer, stronger leadership role in the years ahead. Energy independence will also reduce the amount we pay as a nation for foreign oil, reduce our trade deficit, help scale back our national debt and make us economically stronger.

So, my dear readers, I am very bullish on the U.S. over the long-run because time and again, we appear to prove our prowess by successfully innovating ourselves out of adversity into newer positions of strength.

Now, that said, this golden future is not yet upon us and there are many among us who doubt we can substantially reduce our dependence on foreign oil and gas. Undoubtedly, there will be significant hiccups along the way, so caution is warranted. I think it's a simply question of when we will work out our energy issues, not if. So the bet is to always keep a fundamental faith in our long-term economic prospects.

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Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of "On The Money!" which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America's premier financial and wealth strategists.