As tensions in the Middle East mount precipitously, and show every likelihood of continuing for years or even decades, the U.S. needs to step up its efforts to achieve energy independence. Historically, the U.S. has been able to rely on Arab nations to meet about 30% of its oil needs, but the explosive political landscape in the Middle East could restrict or even shut down that supply at any time.
While the erstwhile popular theory of ‘peak oil’, which postulates that domestic supplies of U.S. oil reached their peak in 2005 and will falter in the future has been widely discredited, it still contains some truth. Even if oil production is not declining, energy consumption is rising rapidly, which is the other side of the coin. At the same time, environmental regulations that restrict the ability of oil companies to drill in protected areas like the Arctic Natural Wildlife Refuge puts pressure on new drilling, and can still lead to an energy shortfall.
On the back of this situation, natural gas has risen in importance. It provides a seemingly endless supply of energy for everything from heating to electricity. Currently, natural gas accounts for 27% of electricity generation stateside, driven by low natural gas prices, and is projected to rise to 30% by 2040. Despite political controversy over ‘fracking,’ a technique used to extract shale gas from the ground, there is little reason to believe that the U.S. can practically afford to impose limits in this arena given the immense value of this resource for our energy infrastructure. In addition, the U.S. currently has 2.2 trillion cubic feet of natural gas, which is enough to last for 92 years, according to the U.S. Energy Information Administration.
However, these statistics are based on demand remaining static at today’s levels. They fail to factor in the possibility of an oil supply deficit in the future, either due to government regulations that restrict new drilling or perhaps a shock in the Middle East, which would automatically lead to the faster consumption of natural gas and cause a supply/demand imbalance in that sector as well.
This means that other sources of energy will be required to supplement natural gas for the U.S. to achieve energy independence.
One possibility is biofuels such as ethanol and biodiesel, which are obtained from plant tissues and are renewable. However, these fuels generate much less energy than crude oil and are difficult to refine. Researchers are working on methods to counter these factors but are still very early in that process. Biofuels are also, contrary to popular notion, not carbon neutral. The other options are traditional sources such as coal and nuclear, which will continue to provide a steady percentage of our energy needs. However, the environmental concerns surrounding these fuels, as with biofuels, could hamper production and provide an impetus for the generation of clean energy, driven by solar, hydroelectric, wind, geothermal, and hydrogen fuel cell technologies.
This is supported by a new report by the United Nations Intergovernmental Panel on Climate Change, which echoes alarms about global warming and highlights the need for the U.S. to seriously examine its progress on energy.
Today, clean energy accounts for only 8% of electricity generation and 11% of total energy production in the U.S. The reason for this is the high expense of producing clean energy relative to the output, and consequently pricing. In addition, investment in low carbon technologies fails to yield sufficient savings to make it cost effective for the power sector and industrial consumers, leading to a slower migration to energy efficient technologies. Making this scenario even more complicated are the mixed signals from policymakers over the years on carbon pricing, which underpins the economics in this arena.
This can all change, however, at the 21st United Nations Framework Convention on Climate Change Conference, set to take place in Paris in 2015. The UNFCCC is expected to set a global protocol for the reduction of CO2 emissions, to be enacted in 2020. The clarity from such a protocol is expected to set the market for carbon at a level sufficiently high to justify investments in environmentally friendly technologies, which would then give both producers and consumers of clean energy better visibility on their investments.
The clean energy sector in the U.S. still has a long way to go. Unlike Europe and China, where the adoption of such technologies is progressing rapidly, American producers have yet to reach the critical mass required to bring down prices, and consumers still lack a real incentive - other than a desire to reduce greenhouse gas emissions - or even options to switch to such sources of energy. This will gradually change as the industry matures but will require U.S. policymakers to push for energy independence.
The turmoil in the Middle East should motivate us to act. In a high-tech world, all commercial activity depends on a stable, sufficient and affordable source of energy. That energy has historically come primarily from oil, but just as natural gas has emerged as a crucial fuel in this environment, it’s time for clean energy to catch up as well. It’s no longer just an environmental imperative but an economic one.
Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.