The United States’ Dirty Energy Revolution

The U.S. is in the midst of an energy revolution. But it has nothing to do with solar, wind or any other renewable energy source. On the contrary, it is a revolution built on oil and gas. Just seven years ago, then-chairman of the Federal Reserve, Alan Greenspan, warned that the U.S. was facing a serious gas shortage. In 2009, the U.S. achieved self-sufficiency in natural gas, and it is now purchasing ships capable of exporting LNG (liquefied natural gas). The reason for the fall in demand for gas in the U.S is “fracking,” a highly controversial method of extraction. As a result of fracking, the U.S. now has enough natural gas for at least 100 years. Only this is “unconventional” natural gas, which lies in shale layers, not in pockets.

At the same time, fracking has changed the global energy panorama, as revealed by an IMF study, and has hurt firms as diverse as the energy monopolies of Norway (Statoil), Russia (Gazprom) and Algeria (Sonatrach), which used to count on U.S. demand and higher prices. Even Qatar, the “Saudi Arabia” of natural gas is looking into obtaining a fleet of ships to meet demand wherever it may be found. This system is much more expensive and unpredictable than the traditional use of gas pipelines and futures markets.

Fracking has broken the link between the price of a barrel of West Texas Intermediate Crude (WTI) and natural gas. In fact, while WTI has shot up, natural gas has gone up very little in the U.S. despite increasing demand. But there are other surprising things about WTI, the main one being that it is now cheaper than Brent crude, the [price] reference used in Europe. Generally, WTI has cost between $2 and $5 more than Brent, since it is lighter and contains less sulfur. Now it is between $15 and $25 cheaper than Brent. Why?

The reason is “unconventional” oil, which comes from two places. One is Fort McMurray, in Alberta, Canada, where the crude produced from the oil sands is now over 800,000 barrels per day, more or less the same amount produced in Oman. Fort McMurray is the closest thing to the movie “Avatar” that one could imagine, a remote area devastated by petroleum exploitation in unbelievably immense open pit mines. About 1,500 km from Fort McMurray is another area that is experiencing a petroleum boom: North Dakota, where production has now reached 300,000 barrels (almost as much as Equatorial Guinea), thanks to its asphaltic shale, from which petroleum is extracted via a system similar to fracking.

The arrival en masse of petroleum from Fort McMurray and North Dakota has overwhelmed Cushing, Okla., a town with barely 8,000 inhabitants. Cushing is the main hub for North American oil pipelines and where crude must be delivered for physical settlement of futures contracts. This is the reason that WTI crude is cheaper than Brent crude for the first time ever.

The U.S. is thus becoming isolated from global petroleum markets, which explains, among other things, its indifference to Libya. Brent is much more affected by the disappearance of Libya’s petroleum production than WTI. The most ironic thing is that this energy revolution is taking place under a president, Barack Obama, who has declared that, “by 2035, 80 percent of America’s electricity will come from clean energy sources.”

One might ask: Can this system be replicated in Europe? Here, things are less clear. To start with, we do not have bituminous sands or shale. And fracking has been prohibited in France, although Poland is developing it to break its dependence on Russian natural gas. In the Spanish province of Cantabria, BNK, a company based in California, has been given permission to explore natural gas extraction via hydraulic fracturing. But for now, the U.S.’ dirty energy revolution is not coming to Europe. In fact, the continents’ differing energy models may aggravate the “transatlantic fracture.” But that is a topic for another blog.