By Dr. Mike Walden
A milestone was recently set in the country, one that – quite frankly – I thought I would never live to see. For the first time in decades, the U.S. exported oil to more destinations than the number of locations from which we imported oil. Although the amount of oil our country imports is still more than we export, the gap between imports and exports has been cut in half in the last ten years.
We still import oil because in some cases it is actually cheaper to do so, and in other situations the quality of the imported oil better fits some of our domestic needs. However, in recent years the U.S. has been rapidly moving to energy self-sufficiency.
It’s been a long-time coming. In the early history of our oil production, the U.S. supplied much of the world with oil. With large quantities of oil discovered in Texas in the 1930s, our country rapidly became the top oil producer in the world. Prior to World War II, many countries, such as Japan, relied on U.S. oil to run their factories. Indeed, the U.S. used the threat of stopping oil sales as a negotiating tactic with Japan prior to World War II.
However, our domestic production ultimately couldn’t keep up with rising usage, and by the 1970s we were importing half of the oil we used. Much of our imported oil came from the Middle East, where massive oil fields were discovered in mid-century. Some analysts argue our dependence on Middle East oil naturally led to our involvement in Middle East politics – something that has been highly controversial.
Now, the U.S. is back among the top oil producers in the world. In fact, in 2019 the U.S. was actually the top oil producer in the world, exceeding both Saudi Arabia and Russia.
Thanks to the U.S. rebound, the world now has ample oil supplies, and this is clearly reflected in prices. In constant purchasing power dollars, the price per barrel of oil is cheaper today than a decade ago. And since gasoline is a derivative of oil, gas prices today are also more moderate.
Another way to measure the benefit of more plentiful oil supplies is to look at how much the average household spends in their budget for energy use in dwellings and vehicles. Despite the proliferation of modern technological devices using large amounts of energy, household spending on energy as a percent of after-tax income hasn’t budged in thirty years.
What happened to take an industry like oil, which was declining four decades ago, to a booming industry today? There’s a one word answer – ingenuity.
The story of oil in the last forty years is the story of how the essence of our economic system works. First, when something is scarce – like domestic oil was in the 1970s – prices will be high and the potential to make big profits even higher. Second, the lure of high profits will motivate risk-takers and inventors to develop ways of finding or creating the source of those potentially high profits – in this case, oil.
The big breakthrough was hydraulic fracturing – or fracking for short. Traditionally oil was found in large underground pools, almost like lakes of oil. Once the underground oil pools were found, it was just a matter of inserting a pipe and drawing the oil to the surface. This could be a fairly inexpensive process.
By the 1970s and 80s, most of these underground oil pools in the U.S. had been found and depleted. Supplies of oil in the U.S. were simply going dry.
But oil can also be encased in rock formations. Accessing this kind of oil is more expensive because the rock formations have to first be split to get at the oil. As long as there were pools of oil floating freely underground, the rock encased oil were ignored.
With the easy-to-access oil pools gone, and with oil prices high, it became feasible economically to go after the rock encased oil. That’s exactly what has happened in recent years. Useable methods were created to break (fracture) the rock and remove the oil. The new fracking techniques have put the U.S. back in the oil business.
Of course, the fracking revolution has not been without its issues. One is safety. There have been debates about whether fracking has harmed the quality of underground water reservoirs. There’s the related concern about the fracking technique’s use of large amounts of water to split underground rocks and the potential depletion of water reservoirs.
Last is a worry that lower oil and gasoline prices resulting from the fracking revolution have delayed the development of renewable energy sources like solar and wind power. The thinking is that if the high prices for oil and gasoline of the 1970s had continued, there would have been an even greater motivation to find alternative fuels. And, those alternative fuels like solar and wind would have looked more appealing compared to the high priced fossil fuels, so more people would have adopted them.
Even recognizing these potential shortcomings of the fracking revolution, there is little doubt it has changed the economic and geopolitical dynamics of the world. Energy prices are lower and U.S. energy supplies are increasingly independent of sources from the Middle East.
Yet recognizing there are possible issues with the hydraulic fracturing technique, and also realizing oil and oil based products are fossil fuels that can emit harmful CO2 to the environment, the question is whether the return of the U.S. as a major world oil producer is a positive or negative milestone. As always, you decide.
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy.