IEEJ: December 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (112)

November 29, 2012

Meaning of “U.S. Energy Independence”
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOne of the most attention-attracting topics for energy experts in the world at present is“U.S. energy independence”. While visiting Britain from November 26 through 30 for an exchangeof views with various energy experts, I felt a strong impression that this topic is the hottest in mydiscussions with globally famed energy experts.
What is U.S. energy independence? According to BP statistics, U.S. primary energy
production came to 1.81 billion tons of oil equivalent against 2.27 billion TOE in primary energy
consumption in 2011, indicating that the United States depended on net imports for 20.3% of its
energy supply. Energy independence means that the United States will reduce its dependence on
imports to zero and become self-sufficient in energy, or that the United States will have beself-reliant on energy supply even without energy imports.
Whether the United States can change its present structure where it depends on imports for
20% of its energy supply hangs on the future of unconventional oil and gas resources development.
This is because the United States is basically self-sufficient in energy supply other than oil and gas
despite the 20% dependence on energy imports. In 2011, the United States depended on imports for
58% of oil supply and for 5% of gas supply. If the supply-demand structure for the two energy
sources changes, the whole picture will change. In fact, the United States' dependence on imports fell
from 67% in 2005 to 58% in 2011 for oil and from 18% to 5% for gas, posting a rapid decline.
Behind the decline in the U.S. dependence on oil imports, such factors as an economic slump, an oil
consumption drop supported by auto fuel efficiency improvement and an increase in unconventionaloil output existed. A key factor behind the falling U.S. dependence on gas imports has been asubstantial expansion in domestic gas output under the so-called “shale gas revolution”. If thepresent oil/gas supply-demand trend continues, the United States will come closer to self-sufficiency
in both oil and gas. Rather, some people expect the United States to become a net oil/gas exporter.
Through the exchange of views in Britain, I felt that there are various views about thefuture picture of unconventional oil and gas production in the United States. There are various
uncertain factors that are expected to affect future unconventional oil and gas development,
including the economics of unconventional oil and gas development as well as growing concerns
about environmental problems accompanying the hydraulic fracturing process for shale gas
production. Depending on future developments regarding these factors, future unconventional oiland gas output will change substantially. As for tight oil production that has attracted attention with
its rapid increase, the gap between bearish and bullish production estimates for 2020 was identified
as close to 4 million barrels per day. Views also vary on how natural gas prices, which have fallen to$2-3 per million British thermal units, would affect future shale gas production. But dominant views
say that the United States will come closer to energy independence as unconventional oil and gas
production continues an upward trend. Specific plans have emerged for exporting liquefied naturalgas from the United States. Some experts also started to discuss the possibility of oil exports. The1IEEJ: December 2012 All Right Reserved
United States has now begun to be expected to achieve oil and gas exports beyond self-sufficiency.
How will the U.S. change affect or transform the world? First, there will be effects onenergy prices. As is well known, U.S. gas prices have plunged under the shale gas revolution. TheU.S. gas price plunge is expected to affect global natural gas prices and gas pricing mechanisms.
This point is important for Japan that has been urgently required to address the problem of the Asianpremium on LNG import prices.
The U.S. oil output expansion will play a role in increasing global oil supply capacity andbe coupled with a U.S. oil demand decline to ease the global oil supply-demand balance. While there
have been such oil price-moving factors as Chinese demand, geopolitical risks in the Middle Eastand OPEC production, the U.S. oil supply-demand balance is expected to become a decisive factorfor oil prices. Given that tight oil planned for an output increase is light crude oil, U.S. oil productionis also expected to exert great impacts on the supply-demand balance and prices in the light crude oilmarket and price gaps between light and heavy crude brands, as well as on the macro supply-demandbalance. The tight oil output expansion (and its implication on light-heavy crude oil pricedifferentials) may greatly affect the economics of oil refiners not only in the United States but also in
the rest of the world.
There were interesting arguments on the U.S. change's impacts on relative prices of majorenergy sources. Due to the gas price plunge, gas has increased its price competiveness and rapidly
replaced coal in the electricity generation sector in the United States. Then, surplus coal has flowed
into European and other non-U.S. markets. As a result, coal has become more price competitive thangas in Europe, leading to an increase in European coal consumption. An expert pointed out that U.S.
energy price changes were causing remarkable imbalances of relative prices between regions andbetween energy sources in the global energy market. Whether the imbalances will remain unchanged
or be corrected may influence global energy supply and demand. An expert said that if the UnitedStates began to export LNG and oil, the country might become a “global hub” for trading in andpricing energy sources. Future developments will attract our attention.
Second, U.S. domestic energy price falls will exert impacts on the national power of theUnited States and these impacts will influence international politics and the world economy. Until
recently, the power or influences of the United States had been well expected to decline on the Iraqi
and Afghan wars and a recession following the Lehman Shock. But we now see a growing view that
the U.S. path to energy independence and energy price drops will be significant for enhancing thenational power of the United States. The country may take advantage of energy price drops for
expanding its industry and employment and enhancing its international competitiveness. A decline in
its oil imports accounting for a key part of its trade deficit may help strengthen the U.S. economy. Asa superpower, the United States may maintain or boost its national power. The United States'
enhancement of its national power and competitiveness will be significant for other major countries
that always consider how to keep their respective relations or distances with the United States. Thismay have some impact on the global order. On a microeconomic basis, some foreign industries may
have to directly vie with their U.S. counterparts with stronger economic competitiveness and growmore conscious of the U.S. presence. Conditions may thus grow severer for foreign energy-intensiveindustries.
Third, there will be some geopolitical impacts involving energy. Will the United States
continue its engagement with the Middle East while becoming self-sufficient in energy? How will
the United Sates treat its commitment to defending key sea lanes for energy transportation? If the2

IEEJ: December 2012 All Right Reserved
United States reduces its engagement with the Middle East, what country will cover the U.S.
presence in the region? How will the Middle East (and other major resources exporters) that loses
the United States as a major market deepen relations with Asia that increases its dependence onenergy imports? Will the transition make smooth headway without triggering frictions or disputes?
These questions are very important for the world and for Japan.
The global energy paradigm since the 1970s has been based on the precondition of theUnited States’ dependence on energy imports. When the precondition changes, Japan will have tocollect wisdom to analyze how the world will change and how Japan should respond to the change.
Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

3