Is the Energy Boom a Mirage?

THE United States is experiencing a boom in oil and natural gas production — one that many people, including Mitt Romney, see as a game-changing, tectonic shift in our energy picture. But while the boom is real, the benefits are less than meet the eye.

The United States produces 1.6 million more barrels of oil each day now than it did in 2008. That’s a significant increase in a world that consumes around 89 million barrels per day, with the United States accounting for about a quarter of that amount. In addition, America’s net petroleum imports have fallen from 60 percent of total consumption in 2005 to 42 percent today. 

This is partly because of new discoveries and the reclamation of “tight oil” using hydraulic fracturing technology that shoots pressurized liquids into compact, underground rock formations — the same technology driving the natural gas boom.

But what does this oil boom really mean? Will it deliver lower oil prices and enhance energy security, which is what most Americans want and many may expect?

We should not be overly optimistic.

First, the boom would mean far more if America alone used its own oil resources. But oil is a global commodity. Imagine a giant pool of oil. No matter where the oil comes from, buyers will pay roughly the same price for it. And all of that extra American oil will be sold chiefly on global oil markets, not set aside for Americans. As an extreme example, Norway is a net exporter of oil but its gas prices are very high, even after accounting for that country’s higher fuel taxes.

Second, it follows that because oil is traded globally, a supply disruption or development anywhere in the world affects oil prices for all consumers. Even if the United States were to import little oil because of a homegrown energy boom, Americans would still be vulnerable to global events that raise the price of oil.

Third, the energy boom probably won’t stop oil speculation — the purchase of oil futures to make a quick buck rather than to obtain oil. Tens of billions of dollars went into the nation’s energy commodity markets in the past few years, earmarked to buy oil futures contracts. Institutional and hedge funds are investing increasingly in oil, which has prompted President Obama and others to call for curbs on oil speculation. Data released in March 2011 by Bart Chilton, a member of the Commodity Futures Trading Commission who has urged limits on speculation, suggest that speculators increased their positions in energy markets by 64 percent between June 2008 and January 2011.

The rub is that despite the domestic oil boom, speculators will still buy oil futures whenever they think oil prices will rise. Of course, extra American oil on the market might temper speculation under some conditions, but then again, it might not.


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