published Wednesday, May 22nd, 2013

Get ready for the new American energy boom

Chris Hopkins

Every U.S. president since Richard Nixon has espoused a policy to make America energy independent. Clearly, none has delivered, and realistically no government intervention could do so. Today, however, thanks to imagination, technology, and free enterprise, the United States stands upon the threshold of functional independence by the end of this decade. Want some good news? Check out the American oil and gas industry.

Last Friday, the Obama administration approved the second application in as many years for a natural gas export license. That's right, exports. And many more projects remain in the pipeline (so to speak) awaiting evaluation of the implications for domestic consumers of gas, including chemical manufacturers and utilities.

Only a few years ago, natural gas supplies were limited, prices hovered around $12 per million BTUs, and U.S firms were building plants to import liquefied natural gas (LNG) for re-gasification and distribution to customers like utilities and power plants. Today, with abundant supplies and prices hovering near $4 per million BTUs, many of these facilities are awaiting approval to reverse the process. These first two permits in Sabine Pass, La., and Freeport, Tex., authorize the collection of domestic gas for liquefaction and export to customers in Japan, Korea, Spain and India.

The process involves cooling the gaseous fuel to minus 260 degrees Fahrenheit, condensing it into liquid form and substantially reducing the volume of a given energy content. The super-cooled liquid is then loaded aboard transport vessels that function essentially as giant Thermos bottles, making long-distance shipment of natural gas economically feasible. Meanwhile, the combination of horizontal well drilling and hydraulic fracturing has dramatically increased the known U.S. reserves of the fuel, creating a glut of supply and portending economic benefits to exporters, manufacturers, and utility customers here at home.

And the good news is not limited to natural gas. The same revolutionary technologies have increased the production of oil in the United States by nearly 50 percent in five years, leading to a 30 percent reduction in imports of crude from the rest of the world. And perhaps most astonishingly, America has gone from being the world's largest importer of refined energy products (gasoline, aviation fuel, etc.) to the world's largest exporter in a span of two years. Who could have predicted that?

Consumers too are likely to benefit in the form of somewhat lower gasoline prices, although a critical determinant of prices at the pump remains the shortage of refinery capacity. Nevertheless, lower oil prices will help keep gas prices in check.

Of course, global energy supplies are fungible, and it is not useful to think in terms of true isolation from the world market in oil and gas. But it is increasingly apparent that America will basically end its notional dependence on Middle Eastern sources of energy by 2020. That is a truly amazing story, and one that no government policy could have produced. Chalk it up to good old American ingenuity and to the inventive power of free markets.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co.

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