Energy State of the Union

On January 28, President Obama will address Congress and the nation with his assessment of the country’s current economic, social, national security, and political well-being.  The speech will undoubtedly include at least a few moments of reflection on the country’s energy security, our progress towards combatting climate change and reducing greenhouse gas emissions, and the important role of new energy technologies in our country’s economic future.  While the White House must by necessity devote only a few carefully worded paragraphs to energy, we wanted to take the opportunity to examine the state of our energy union at greater length.

2013 was another remarkable year of continued change for energy in the United States.  Generally speaking, in an otherwise rather gloomy domestic and foreign policy environment for the Unites States, energy has been a good news story.

We’re producing more of almost every type of energy:

•    Dry natural gas production is at the highest levels ever in the United States although production only grew by 1 percent between 2012 and 2013. Production has increased by over 21 percent since January 2010 —an increase even more impressive given the fact that prices in December 2013 were much lower than prices at the beginning of 2010. Drilling productivity increases in the Marcellus shale accounts for the majority of the year over year increase along with some gas production in plays that contain dry gas mixed with natural gas liquids.
•    Crude oil production has surged. By the end of last year, monthly domestic production was at a level not seen in the U.S. since 1989. Current projections indicate that production could reach the 1970 all-time high of 9.6 million barrels per day by 2015.
•    Renewable energy generated 13 percent of electricity in December 2013, up from 11 percent in December 2010. And for all renewable sources, the net summer capacity of utility scale units was up 6 percent in November 2013, compared with November 2012 (fossil fuel net capacity declined over the same period).  For January 2014, 27 of 36 planned electric generating unit additions were renewable energy.

At the same time, we’re consuming less energy:

•    Electric power demand recovered a bit after dipping significantly during the recession—but was basically flat year-on-year.
•    Gasoline demand has plateaued after a serious decline post-2008 recession. Although it is still an open question of whether this is the plateau or the beginning of a steeper decline, the U.S. Energy Information Administration does not forecast any significant gasoline consumption increases in the next two years.
•    Efficiency gains are still taking place across the economy, although there is still significant room for improvement.

The changing picture on the supply and demand sides means that we’re exporting more energy:

•    Refined petroleum products exports jumped to 2.95 million barrels per day in October, a rise of about 10 percent in just one year—and a jump of 70 percent in the last ten years.
•    Natural gas pipeline exports to our neighbors have seen dramatic growth; the early months of 2013 (when the weather is cold is demand is greatest) saw a peak of nearly 99 billion cubic feet (Bcf) in January. This compares with about 84 Bcf the year before, and only 25 Bcf in 2003. A similar trend is evident for Mexico. Summer demand peaked at just over 62 Bcf in July 2013, compared with 60 Bcf the year prior. Just ten years ago, that number was not even 29 Bcf—in other words, in the course of ten years, we have doubled our natural gas pipeline exports to Mexico, and more than tripled our pipeline exports to Canada.

The flip side of the same coin is that we are less import dependent:

•    Overall, when accounting for all energy sources (including coal, electricity, natural gas, petroleum, and biofuels), we have cut our overall level of energy imports by about 15 percent.
•    Petroleum imports (including products) are down 10 percent year on year, and down nearly 15 percent since 2011.
•    Natural gas imports are down nearly 12 percent year on year, and 23 percent since 2011.
•    In part because we are importing less energy, our trade deficit has shrunk to $34.3 billion in November 2013—down about $8 billion from November of 2012.

The good news is that our expanded production and reduced consumption, along with efficiency
gains, have actually led to declining carbon dioxide and other greenhouse gas emissions:

•    Energy-related CO2 emissions are 10 percent below 2005 levels, a perch from which some have suggested we could still be on track to meet 2020 target of 17 percent below 2005 levels within the global climate regime.

That is a lot of good news, and has resulted in economic benefits as well. The oil and gas industry has rightly touted the link between job creation, economic growth, and the resurgence of U.S. hydrocarbon production. The new U.S. energy landscape has also inspired others to start speaking about an energy renaissance, and pointed to a need for U.S. policymakers to shift their mindset from one of scarcity to one of abundance.

Yet in the midst of all this energy exuberance, it would be foolish to overlook the full picture.  Some parts of the energy sector are struggling, and some are even victims of their own success.

•    Oil and gas developers are having difficulty timing investment and production with infrastructure development in order to move products to market, make a fair return on their investment, and reinvest in new projects. Production has simply come on faster than the midstream infrastructure can keep up.
•    Partially as a result of the delay in permitting and building pipeline infrastructure, the push to move ever more crude oil out of areas of rapid production increases has led to a dramatic rise in the amount of crude being moved by rail.  Consequently, serious rail accidents involving crude oil have become a more frequent occurrence. Before a recent spate of accidents there was some agreement on how to make rail transportation of crude oil safer, but nothing was likely to be implemented for several years. In recent weeks, however, high-level political interest has increased as concerns about classification, tank car integrity, and liability issues persist.
•    Communities are actively weighing the perceived risks of accidents and community disturbance that could come with oil and gas development against the economic value their communities derive from these activities. Some communities have pushed back against oil and gas development, including some towns that have placed moratoria on drilling. Others have expressed their concerns—ranging from water to earthquakes—with state and local governments and industry.
•    Cheap, abundant natural gas has challenged the economic competitiveness of some segments of the renewable energy industry. In addition, a significant downscaling of government stimulus programs and very little certitude about the future of existing tax credits have also made renewable energy’s near-term outlook uncertain.  Finally, utilities have begun pushing back against net metering in some states, threatening the viability of the solar distributed generation model in those states.
•    The nuclear energy industry is struggling to revive an economic case for its existence while continuing to be undercut by cheap natural gas, declining demand, and renewable energy mandates. This year, only five new reactors were under construction, all of which have announced delays and budget overruns. Two existing nuclear plants have gone into retirement and upcoming retirements were announced for two other nuclear plants.
•    The electric power sector in general is experiencing disruptive challenges from all directions. The utility business model is under stress in some regions. New regulations and unmet infrastructure investment needs are a challenge, new technologies, distributed generation, and consumer choices are proving difficult for utilities to adapt to, and reliability and cybersecurity issues are no closer to a long-term solution than before.

Perhaps the most significant unresolved issue in the energy sector this past year was the continuing battle over the role of policy in achieving a low-carbon future. In political terms, the energy world is divided into camps: those who want to pursue a fundamentally different energy system divorced from fossil fuels and those who either don’t believe it is possible, don’t believe it is necessary, or both (plus a third camp who thinks it’s probably desirable but too costly). Much of the underlying tension in energy policy is a fundamental difference of policy views between those in each camp.

At present, energy infrastructure projects have become a proxy battle in the larger war over climate policy.  The new rules governing new power plant emissions and the upcoming rules governing existing power plant carbon emissions will be another major venue for this ongoing dispute. The issue of energy exports has also, to a lesser extent, been part of this ongoing fight over energy priorities.  Budget battles and tax reform debates all repeatedly bear witness to the ongoing dispute over which way we are headed and how best to use energy to benefit the economy. 

Recent indications are that these battles are likely to persist for the foreseeable future. Just this past week, a group of 18 environmental organizations sent a letter to the president urging him to end his pursuit of an “all of the above” energy strategy – a position often used by the administration to illustrate middle ground between keeping the current energy system robust while supporting the transition to  a low carbon future. Several days earlier, groups representing the oil and gas industry touted the benefits of oil and gas development to the domestic economy with virtually no mention of climate change. It is difficult to see a resolution in sight.

On balance, the energy state of the union is strong, but in the midst of monumental changes. For several years now the United States has been caught up in the exuberance and anxiety that comes with the onset of new trends. We are now in a more somber position of evaluating the implications of this change and, perhaps, for policy to start tackling some of its repercussions. 

Sarah Ladislaw is a senior fellow and director of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michelle Melton is a research associate with the CSIS Energy and National Security Program.

is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2014 by the Center for Strategic and International Studies. All rights reserved.


Sarah Ladislaw

Sarah Ladislaw

Former Senior Associate (Non-resident), Energy Security and Climate Change Program

Michelle Melton