This paper is part of an MEI scholar series, titled "Obama's Legacy in the Middle East: Passing the Baton in 2017." Click here to view the full project, or navigate using the table of contents to the right.
President Obama’s Energy Policy
Candidate Obama was faced with major energy challenges in 2008. They ranged from the reality that replacing fossil fuels with renewable energy would take decades to the fact that security of oil supplies would remain a long-term problem. A commonly shared perception at the time was that not only was U.S. oil and natural gas production declining but that global oil reserves were becoming scarcer. Public concern about global warming was also strong and needed to be addressed.
From the outset, President Obama had a green agenda, and he was convinced that the United States had to take a leading role in the global energy transition away from fossil fuels to renewable energy. While the outlook for future U.S. oil and gas production looked grim at the time he took office, the president elect believed that if the United States were to succeed in taking the leadership role in the move to a new clean energy economy, the nation would lead the twenty-first century global economy.
In order to achieve his goal of creating a new clean energy economy, Obama’s energy agenda in 2008 focused on reducing oil imports and fossil fuel use in general, promoting renewable energy through tax credits and direct subsidies, enhancing energy security, and taking a leading role toward a global agreement on CO2 emissions. To achieve these goals, all energy and environment agencies in the U.S. government were to be staffed with strong advocates of clean energy and environment.
The global economic crisis of the time enabled the president to allocate $80 billion in funds from the stimulus program for the development of renewable energy sources and to improve energy efficiency in all sectors of the economy. The funding helped create jobs and led to an expansion of solar and wind power until the special program that headed the initiative ran out of money. The administration failed to get a cap and trade bill to cut CO2 emissions passed in the House of Representatives, but it made a commitment to cut such emissions by 17 percent in 2020 at the Copenhagen Summit in December 2009.
In the meantime, it had become apparent that less than two years into the first Obama administration the oil and gas industry, without help from the administration, had achieved major successes in economically producing shale gas and tight oil. Government as well as industry projections turned very optimistic about continued tight oil and shale gas production growth. Counter to the pre-2008 assessments calling for major imports of LNG and a continued surge in oil imports, natural gas imports began to decline and facilities were built to export LNG in the future. Oil imports also began to decline due to stagnant demand and an increase in tight oil production of almost four million b/d (larger than the entire oil production of either Iran or Iraq) between 2008 and 2014.
The Current Situation
The administration’s original perception of growing energy scarcity during Obama’s first term in office has almost been entirely reversed during his second term. Obama’s energy policy has evolved from an aggressive pursuit of environmentalism to a somewhat more pragmatic adaptation to the realities of emerging oil and gas markets in the United States. The administration has remained opposed to hydrocarbon fuel but has slowly begun to accept the shale gas production explosion as a bridge fuel to alternative green fuels. The abundance of low-cost shale gas has enabled the president to act strongly against older polluting coal-fired power. Since the sun does not always shine and the wind does not always blow, natural gas is now seen as an intermediate supplementary source of fuel until better batteries will be able to store wind and solar energy.
The domestic energy situation in the United States has also dramatically changed since the first year of the Obama administration. Net crude oil and product imports have been halved between 2007 and 2014 to about five million b/d and continue to decline. As for natural gas imports, net LNG and pipeline gas imports are down by almost two thirds since 2007. Obama can claim that during his tenure in office U.S. dependence on imported oil and natural gas has been reduced significantly, though this shift is largely due to the private sector operating on private rather than federal lands. Obama’s biggest contribution has been the passing of new Corporate Average Fuel Economy (CAFE) standards, which are already having an impact on automobile efficiency and will continue to reduce gasoline consumption in the United States for many years to come. A combination of initial market forces and later EPA implementation of the Clean Air Act has reduced U.S. CO2 emissions, a trend that is expected to continue. The administration expects to play a leading role at the Paris Climate Conference in 2015.
The success in reducing U.S. oil imports by about 50 percent since 2008 has had a positive impact on global oil prices. There is little doubt that without the increase in U.S. oil production oil prices would have been higher in recent years. Geographically, the decline in U.S. oil and other liquids imports has not been spread evenly. The biggest decline (about 50 percent) was from non-OPEC countries. Oil imports from OPEC producers, including the Persian Gulf countries, are down by about 40 percent, and imports from Saudi Arabia have declined by only 13 percent between 2008 and 2013. The main reason for the differences between the Persian Gulf countries and, for example, Nigeria and North Africa is related to the gravity and sulfur content of crude oil. The incremental U.S. crude oil production is light and sweet oil, replacing similar oil from OPEC and non-OPEC countries. The Persian Gulf countries produce a heavier and sourer crude oil, which is a desirable crude oil for sophisticated upgrading refineries in Texas. In addition, Saudi Arabia is the part owner of the Motiva refinery in the United States, which has a capacity of 600,000 b/d. These refineries use primarily Saudi crude oil. And, by August of 2014, net crude oil and product imports from Canada had become almost one third higher than net crude oil and product imports from the Middle East.
Drivers and Dynamics
U.S. production of tight oil and conventional oil from the Gulf of Mexico will continue to be a major driver for several more years, further reducing U.S. net crude oil imports. It should be noted, however, that since the summer of 2014, oil prices have dropped by about $25 a barrel to around $75 a barrel. It is not yet clear what will happen to U.S. tight oil production after 2014 if the current or lower oil prices prevail for several years. While most oil analysts are cautiously optimistic that at $80 a barrel U.S. tight oil production will continue to increase, albeit at a slower pace, they do not exclude a slowdown in production growth or temporary stagnation until oil prices increase again. Lower oil prices will also impact the production of Canadian non-conventional oil, most of which is exported to the United States. The administration can positively impact the growth in tight oil and shale gas production by making more federal land available to the industry and minimizing federal interference on the development of oil and gas on private land. It is feared that local objections to fracking may lead to additional federal government regulations.
Beyond the early 2020s the future of U.S. tight oil production is less clear. Many analysts believe that tight oil production will reach a plateau later in the decade, followed by declining production in the next decade. Optimists, however, believe that new technologies and higher prices may extend production growth well beyond the 2020s. Due to an imbalance between light sweet oil (U.S. tight oil) and sourer and heavier oil (Middle Eastern oil), the United States will continue to import some oil from the Middle East and, if the current oil export ban is lifted, export light sweet oil. Net oil imports, however, are expected to continue to fall at least through the early part of the next decade. If the lower range of U.S. tight oil resources proves to be correct, it is possible that U.S. oil imports from the Middle East could rise again from the mid 2020s onward.
The picture for natural gas is more optimistic in the sense that the known resource base is higher. Natural gas is currently demand constrained in the United States, but future domestic demand growth and LNG exports will push volume up significantly. The U.S. Energy Information Administration (EIA) reference case shows U.S. shale gas and tight gas production increasing through 2025.
Strategically, with U.S. net oil imports continuing to decline and imports from Canada projected to rise further, the United States will be less exposed to oil supply disruption than either Europe or Asia. While the United States and Europe both receive about 20 percent of their oil imports from the Middle East, about half of Europe’s imports come from the former Soviet Union. In contrast, Asia now relies for half of its oil imports on the Middle East. Two thirds of Middle East oil exports are now destined for Asia. This trend and the overall growth in merchandise trade between the Middle East oil producers and Asia are expected to increase further.
Obama’s Legacy on Energy Policy
The Obama administration has had little to do with the shale gas and tight oil revolution, which was entirely engineered by the private sector, but it has benefited from the impact of the strengthened U.S. economy and balance of trade, including the creation of three million jobs.
The Obama administration can take credit for refraining from over regulating non-conventional oil and gas developments. It can also claim credit for a major contribution to domestic energy security because of tougher efficiency standards for cars and trucks as well as for taking advantage of the promising new natural gas supplies by implementing strict CO2 emission standards for electric utilities, leading to a drop in U.S. coal consumption.
Important decisions that will shape Obama’s legacy regarding oil security lie ahead. If the U.S. government approves a proposed pipeline taking Canadian crude from oil sands to Texas, where refineries can profitably turn Canadian heavy oil into light products, an additional million b/d of Canadian oil exports could enter the United States. Additional Canadian oil exports could further reduce the demand for oil imports from outside North America. Allowing the Keystone XL pipeline to be built would create jobs during the construction phase but, more importantly, around 90 percent of the revenues earned by Canada would return to the United States in the form of products and services bought by Canada from the United States. At this point, given opposition by environmental lobbies, the administration is unlikely to approve the Keystone XL pipeline from Canada in the near future unless a compromise can be reached with the Republican-dominated Congress.
In another important decision, the president could lift the existing crude oil export ban, enabling excess light oil to be sold abroad. The rapid growth in non-conventional oil and gas has also enhanced U.S. oil and gas supply security. U.S. oil imports have been halved in the past decades and are likely to fall further. The United States will also become a net exporter of natural gas within the next few years. The second Obama administration has strongly supported natural gas exports (LNG) for reasons of national security.
In sum, President Obama can claim that during his administration U.S. oil consumption peaked, CO2 emissions declined, and both oil and natural gas production returned to a level not seen in decades. Moreover, U.S. oil and natural gas imports have fallen sharply and the continuation of this trend would enhance U.S. national security. Risks still include the fact that oil prices are not primarily determined by the United States but by the global market. OPEC, in particular Saudi Arabia, has a major impact on oil prices by limiting or expanding production. Moreover, the 2011 upheavals and sanctions in a number of major oil-producing countries in the greater Middle East have reduced production in Libya, Yemen, Syria, and Iran and have slowed production growth in Iraq. The political future of the region is highly uncertain and major oil (and gas) supply disruptions can occur at any time as long as the regional conflicts have not been contained. The United States, with support of a “coalition of the willing,” has no choice but to remain engaged in the region to protect its own and global economic interests.