Mitt Romney has released an updated energy plan, and other than the presence of a very stupid phrase in its title — “Energy Independence” — it is excellent: liberalizing the permitting process for petroleum exploration and extraction and putting the states in charge of inland projects (though that probably means kissing California’s Monterey shale goodbye), all with an eye toward the long-term investment that is the source of real economic growth.
While the idea of North American “energy independence” is almost meaningless in the context of a tightly integrated global oil market, Romney is correct if somewhat overoptimistic in his take: “We have an unprecedented opportunity to make our natural resources a long-term source of competitive advantage for our nation. If we develop these resources to the fullest, we will not only guarantee ourselves an affordable and reliable supply of energy, but also enjoy benefits throughout our economy. Our trade deficit will shrink, our dollar will strengthen, and tens of billions of dollars will flow to the treasury. Perhaps most importantly, we will experience a manufacturing resurgence that delivers more jobs and more take-home pay for middle-class families across the country.”
That isn’t just fanciful political talk. The trade issues related to oil are complicated in that we are (contrary to what you hear on the news) already a net exporter of petroleum products, but oil imports account for about half of our very large trade deficit. We import a lot a lot of crude and export a lot of gasoline and natural-gas products. In fact, we export more refined petroleum products than any other country in the world.
As I argue in the upcoming issue of National Review (available Friday), the point of ramping up U.S. oil production isn’t to stick it to the Arabs (Canada is our largest foreign supplier), and our staunch allies the Saudis will continue to divert oil profits into terrorism no matter what happens in the U.S. petroleum industry. The point of expanding our energy production is to make the country richer. Done right, freeing up the energy industry could make the country significantly richer, as in points-of-GDP richer: Citi researchers estimate that it could add as much as 3.3 percent to GDP. (Some of that growth comes from technological improvements and regulatory mandates that will reduce consumption and send capital into other more productive enterprises.) Romney cites the Citi research, which is worth quoting at length:
US demand has fallen by some 2-m b/d since its peak in 2005 in part due to the recession but also due to a structural change due to demographic changes, policies on fuel efficiencies and the mass-commercialization of technologies. The more exciting part of the answer is on the supply side as the US has become the fastest growing oil and natural gas producing area of the world and is now the most important marginal source for oil and gas globally. Add to this steadily growing Canadian production and a comeback in Mexican production and you get to a higher growth rate than all of OPEC can sustain. Five incremental sources of liquids growth could make North America the largest source of new supply in the next decade: oil sands production in Canada, deepwater in the US and Mexico, oil from shale and tight sands, natural gas liquids (NGLs) associated with the production of natural gas, and biofuels. Putting these together, North America as a whole could add over 11-m b/d of liquids from over 15- m b/d in 2010 to almost 27-m b/d by 2020-22.
The shale gas production boom that propelled the fundamental change in the natural gas markets in the US could begin to transform other sectors including power generation and transportation. Other incremental gains could come from LNG exports with North America acting as the swing supplier for the world. But the most momentous change looks likely to be in the re-industrialization of America based on dramatically lower cost feedstock than is available anywhere in the world, with the possible exception of Qatar.
The economic consequences from this supply and demand revolution are potentially extraordinary. We estimate that the cumulative impact of new production, reduced consumption and associated activity may increase real GDP by 2.0 to 3.3%, or $370-$624 billion (in 2005 $) respectively. $274 billion of this comes directly from the output of new hydrocarbon production alone, while the rest is generated by multiplier effects as the surge in economic activity drives higher wealth, spending, consumption and investment effects that ripple through the economy. This potential re-industrialization of the US economy is both profound and timely, occurring as the US struggles to shake off the lingering effects of the 2008 financial crisis.
Romney and the Republicans have a winner in this issue: This isn’t green dreams and Solyndra vapor — we know where the oil and gas are, and we know how to get them. (And we know how to get them cleanly.) It doesn’t hurt that a lot of that wealth is located in Ohio and Pennsylvania, either.