Arc of Development in the United States

The story of the current state of energy in the United States begins in 1859 in what had been, to that point, the sleepy little town of Titusville, Pennsylvania. That’s where the first U.S. oil gusher was discovered, and it unleashed America’s first oil boom, which lasted from 1859 to the 1870s. Prior to the discovery at Titusville, America’s cities were largely powered by coal. Those living in rural America, which was most of the population in those days, got their energy from burning wood. Some even still used whale blubber as fuel for lamps when they could not get kerosene (due to low supply or higher cost).

Titusville changed all that. Overnight, we had a new, magical, seemingly endless source of energy to tap into—and tap into it we did. It not only fueled the Pennsylvania oil boom, but ushered in an era of “wildcatting” (an exploratory process of groups or individuals prospecting for oil in new areas) that has not been replicated anywhere else since. No telling of this period would be complete without mentioning the important milestone that occurred in 1870 in Ohio: the founding of a small refining company by a man named John D. Rockefeller and a small group of other investors. The company was called Standard Oil, and until it was forcibly dissolved in 1911 due to new antitrust laws, it led and shaped the development of the oil industry, not just in the United States, but the world over. At the point of its dissolution, it was estimated that Standard Oil controlled in excess of 80 percent of the oil flows in the United States.¹

But, as exciting as the Titusville find was, it can’t be marked as the birth of the modern oil industry, or America’s committed foray into it. That distinction goes to a place called Spindletop, a field near Beaumont, Texas, where a gusher of a size never before seen was discovered on January 10, 1901.² This particular oil find was so productive that it caused oil prices to plummet from $2 per barrel to just $0.03 as its output glutted the market—demonstrating the economic principle of supply and demand. However, it didn’t take long for our enterprising nation to find ever more uses for the new “black gold,” and those prices quickly recovered. From there, the hunt was officially on, and the wildcatting phenomenon that swept across the continent was every bit as exciting and dynamic as the gold rushes our nation had seen before.

Then, in 1908 Henry Ford introduced the Model T. That was when the consumption of crude oil really started to accelerate. Previously, automobiles were wildly expensive luxuries, but now the average working American could afford to buy a car. Ford revolutionized the automobile industry by learning how to make a lot more cars, for a lot less money, in a lot less time. His innovation? The moving assembly line. Affordable cars changed American society and American lives. The demand for the Model T became so strong that we soon became addicted to crude oil to feed our appetites for automobiles.

Discoveries in the Middle East

Oil was first discovered in the Middle East in 1908 in Persia, or what is today the nation of Iran. These new discoveries sent global production levels ever higher, and the industrializing Western world was ever hungrier for its output—so much so that Middle Eastern exploration continued unabated by the companies spun off after the breakup of Standard Oil, as well as a number of European companies. Like Spindletop in Texas, the Middle East’s defining moment was the discovery of the virtually limitless oil fields of Saudi Arabia in 1938. This was a turning point for the oil industry, and what made it a truly global phenomenon.

It is also important to understand that the oil produced belonged to the companies that did the work of drilling it and shipping it off to refineries. Yes, the countries from which the oil was extracted were paid for their resource, but the lion’s share of the profits went to the Western companies who were handling the logistics of pulling it from the ground. This was true for two reasons. The first was simple pragmatism and business. The second reason is that, by and large, the population of the Middle East lacked the expertise and engineering skills to extract the oil.

When the Ottoman Empire (historically referred to as the Turkish Empire or Turkey) was sundered in 1922, vast swaths of the Middle East were colonized by various European powers. Their lands were no longer their own, and neither were the immense resources they contained. That, combined with the aforementioned lack of technical skill to extract the raw materials, made it a given that the countries with oil resources were largely shut out of the profits realized from its extraction.

And it was extracted. By the end of World War I, demand for oil was surging, prompting ever greater investments in any area that was likely to contain oil reserves. Given the previous finds in Persia, the three Ms—men, materials, and money—poured into the region to explore and extract whatever could be found. Now we are historically at a point where most readers are likely to be familiar with the events. Everyone knows the results of those explorations. They led to some of the largest oil finds in history, and as they did, Western companies gained an ever-tighter stranglehold on Middle Eastern oil.

The Rise of Nationalization

The stranglehold began to change in 1960, with the formation of the Organization of Petroleum Exporting Countries (OPEC). Previous to the formation of this group, Iran (formerly Persia) led the charge and nationalized its oil resources, summarily throwing out the Western companies and taking command of its own resources. The formation OPEC laid the groundwork for others to follow, and they did. Iraq nationalized its reserves in 1961, Burma and Egypt in 1962, Argentina and Indonesia in 1963, and Peru in 1968.

Overwhelmingly, the reason cited for the drive toward the nationalization of oil resources was exploitation by the West, and although it took OPEC a number of years to find its footing and get itself organized, given the hostile climate and the wave of nationalization that followed its formation, it was only a matter of time before it led to a showdown. Having gained control over their national resources, and knowing full well that the West had come to rely increasingly on Middle Eastern oil, the day inevitably came when the Middle Eastern countries sought to use their rising economic power as a heavy club.

The Embargo Period

To understand what specifically led to the 1973 Oil Embargo, it is important to note three international events. First, in 1970 U.S. oil production peaked. When it did, the United States became ever more dependent on Middle Eastern oil to meet its insatiable appetite. Second, on October 6, 1973, the Yom Kippur war began, wherein a number of Arab states banded together to launch a surprise attack on an unprepared Israel in an attempt to push the nation of Israel into the sea. In this, they were spectacularly unsuccessful, and despite being hopelessly outnumbered, Israel prevailed against them. Third, and perhaps most important, on October 12, 1973, in response to a Russian treaty arming the Middle East against Israel, the United States began airlifting weapons and supplies to that beleaguered nation.

Seeking to punish the United States for its pro-Israel stance, OPEC banded together and issued an embargo. It was this action that prompted President Nixon to take his message to the people of America. In that message, he went on television to promise the American people energy “independence” within 10 years. Needless to say, we didn’t come close to reaching that goal.

The reality was that the Oil Embargo proved to be an effective weapon in the short run. The recession it caused in the United States was notably sharp and painful, but certainly not debilitating. In the long term, though, its success has been debatable. Although the United States did not succeed in its quest for energy independence in a decade, the embargo did redouble U.S. efforts to find alternate sources for the fuels necessary to power its industries. Those sources were systematically found and developed, leading to additional discoveries worldwide, including many within the borders of the United States itself. The cumulative impact of those discoveries, along with improvements in technology that made previously inaccessible oil resources obtainable, eroded the power of OPEC. This is not to say that they are utterly without power. OPEC nations still command an enormous chunk of global oil production but, based on current trends, the United States is on track to become the world’s largest oil producer, moving ahead of both Russia and Saudi Arabia by 2015.³

Current Trends

In recent years, we’ve seen another emerging trend that is every bit as important as those that have come before. China’s entry into the solar panel market has dramatically reduced prices. In many parts of the country, solar energy is competitive with, and often cheaper than, energy from coal-fired power plants. This is leading to a revolution unlike any the energy industry in the United States has seen to date.

According to one of the world’s leading inventors, Ray Kurzweil, all of the world’s energy needs can be met with 1/10,000th of the sunlight that hits the Earth each day.

Specifically, solar energy is leading to a decentralization of energy production. With solar, individuals are now empowered, they have all the tools they need to see to their own energy production. They can be, if they wish, energy independent. On the whole, state-level governments have embraced this new paradigm, with 43 of them signing net-metering laws to date. The significance of this cannot be understated: Net metering allows individuals to stay connected to the centralized power grid, while generating some fraction of their total power needs. In months where they produce more energy than they need personally, they can sell their excess power back to the grid and draw from it during times when their individual output is insufficient to provide 100 percent of the power they need.

The central grid then, acts as a giant battery, removing the necessity for individuals to invest in expensive battery banks to provide power during periods of low panel output. The battery backup system has historically been the single-most expensive component of a private solar power system, and that fact, coupled with the impact of Chinese industrial, might lower the per unit cost of panels, has created a significant paradigm shift.

Finally, one cannot examine current energy trends in the United States without giving a nod to Elon Musk. Tesla automobiles are arguably the best cars ever made, and Musk has not only delivered the Holy Grail of all electric cars, with a staggering 200+ miles per charge range, but has also single-handedly built a network of charging stations that span from one end of the country to the other.

In looking at the energy landscape now and in the future, these factors cannot be ignored. Simply put, the more deeply entrenched these new technologies become in our economy, the less we’ll have to use the finite resources we are extracting from the ground. That, in turn, provides a one-two punch that puts the United States firmly on course for the energy independence we have been seeking for more than four decades.

U.S. energy independence relates to the goal of reducing U.S. imports of oil and other foreign sources of energy. Being energy independent means that the United States will be unaffected by global energy supply disruptions due to politically unstable countries and/or other macroeconomic issues. (It is easy to see the parallel between oil resources and the money resources in your own life, and how being financially independent removes the worries that come from being reliant on a job or business enterprise, isn’t it?)

Oil and Natural Gas

Two things are driving the current U.S. energy boom: the lifting of the moratorium of offshore drilling and shale. Shale provides the United States with both oil and natural gas in abundance. In fact, the United States has been called the “Saudi Arabia of natural gas” for good reason.⁴ We’ve known the locations of the major formations for decades, but it has only been recently, through modern technology, that we’ve been able to squeeze the oil and natural gas from the land.

Entrepreneur George Mitchell pioneered the horizontal drilling technique called fracking (hydraulic fracturing). The technique includes drilling down (sometimes miles), turning horizontally, and injecting water and sand under pressure to force the release of natural gas from layers of rock. The technique can even rejuvenate existing oil wells.

While fracking may sound great at first, there are some potential environmental issues, including the risk of earthquakes, extraordinary use of water, and the potential of polluting aquifers. Gasland (2010) by Josh Fox is a fairly damaging documentary that showed the iconic image of a person holding a lighter up to their tap water and igniting it. It was shocking, to say the least. These concerns are, by and large, overplayed in the media. This is not to say that they aren’t legitimate, and they are being addressed, but these improvements are being done in tandem with extraction, rather than halting extraction until the issues are fully addressed.

As the images clearly illustrate, we have barely scratched the surface in terms of shale extraction of oil and natural gas. This isn’t a short-term boom, but the beginning of a very long era of renewed resource extraction in the United States.

The results of this new flurry of activity are allowing the United States to import less foreign oil and natural gas. This is proof that we are increasingly coming to rely on our own resources to meet our energy needs.

OPEC’s Mistake

Doug Cote, Chief Market Strategist with Voya Investment Management, has this to say about OPEC’s future: “By choosing to ignore Econ 101, the Organization of Petroleum Exporting Countries (OPEC) sowed the seeds of its own destruction. Persistently high oil prices inspired the U.S. energy renaissance, as oil-path entrepreneurs married age-old drilling techniques with modern technology to launch the most unexpected and successful supply side shock in a generation—supply that would not have been feasible at lower oil prices. We expect drilling technology will continue to improve apace, increasing output, lowering costs, and putting the OPEC cartel—a myopic and monolithic monopoly—out of business.”

What Our Emerging Independence Means for Manufacturing

North America’s emerging energy independence has cast-off effects as well. In addition to the effect of growth in global supplies pushing prices lower, our total energy costs will continue to be lower than those of our competitor nations around the world, making the United States an increasingly attractive manufacturing location. North America’s energy independence will make the United States an attractive place to manufacture goods and to build service companies.

Let’s not forget that for decades, the United States suffered the effects of offshoring. Millions of manufacturing jobs disappeared from our shores. Happily, those jobs are in the very beginning stages of returning now, thanks to our highly competitive labor force and our low energy costs.

Global Impacts

On one hand, it would be tempting to say that the surge in U.S. oil production would hurt the economies of the trading partners from whom we currently import large amounts of oil. Indeed, at first glance, the numbers would lend the appearance of a very large negative impact.

Oil Exports to United States as Percentage of Domestic GDP

• Angola: 8.1 percent (2012)
• Nigeria: 6.6 percent (2011)
• Kuwait: 4.4 percent (2010)
• Saudi Arabia: 8.3 percent (2011)
• Iraq: 4.5 percent (2010)
• Canada: 5.7 percent (2012)
• Mexico: 4 percent (2012)⁵

To provide some context for these figures, when the United States suffered through the Great Recession from 2007 to 2009, our GDP contracted by 7.6 percent annualized.⁶ To say that the results were unpleasant is an understatement, so you can see by looking at the numbers above that if the United States were to suddenly stop importing from these nations, the hit to their respective economies would be dire. On the other hand, it is unlikely that the United States would ever completely stop importing at least some of its oil, but with surging production of our own, we could certainly be more strategic about it. We absolutely would not have to rely on Middle Eastern oil, and could content ourselves primarily with imports from North America and/or valued strategic partners around the world. Even then, though, the consequences to those we stopped buying from would not be as dire as the figures above might lead you to believe. In the first place, the United States wouldn’t simply cut off all imports overnight. It would be a gradual drawdown that would likely take a number of years to play out. Secondly, the burgeoning economies of China and India are resource starved, and with their combined population some seven times greater than our own, they would quickly fill the gap in demand that the United States left. It could possibly play out like this: As the United States increasingly withdrew from the global oil market, prices would inevitably begin to fall. As prices fell, it would create more opportunities for cash-strapped entrepreneurs in China and India to make investments, relying on cheap oil to fuel their enterprises. In the medium term, this would cause prices to rise again, and these newly formed companies could pay the increase in price because they would be turning a profit at that point. The net effect then would be nominal, although there would be some pains for these nations as exports to the United States began to drop off and prices dipped.

In the time since I began writing Economic Energy, the price of oil has dropped from $100 ( July 2014) to $52 (February 2015).

Renewable Energy

The utilization of fossil fuels will continue to be the primary source of electricity for the United States for the foreseeable future. See the table shown here. With that being said, the world is beginning to explore different ways to harness renewable energy.

Solar Power

Of all the renewables, solar offers the biggest, best, and brightest potential in the long term. There are a number of new or emerging technologies making solar ever more attractive. The United States has 43 gigawatts (1 billion watts = 1 gigawatt) of solar plants either currently being built or in the planning stages. Germany just crossed an important threshold and is now generating 31 percent of its base load electrical needs from renewable resources like solar and wind.⁷

The beautiful thing about solar, aside from the fact that we’ll never run out of it, is that its impact can be felt both at the level of centralized power supply (power plants) and decentralized power supply (individuals installing their own systems). Taken together, these provide a powerful one-two punch that is making solar increasingly hard to ignore.

When you factor in the continuing efficiency improvements in solar panels, and new advances in cheap, high-capacity battery storage, it seems clear that solar could play an increasingly important role in both our overall energy mix, and in our bid for energy independence.

Despite our vast oil reserves and deposits of shale, eventually those finite resources could run out. The more we can come to rely on renewables, the less likely the chance of exhausting our finite resources.

Other Alternative Energy

There is no shortage of alternate energy ideas on the market today. There are high-efficiency wind turbines, great for rural areas, and especially well suited for the American Midwest; biogas reactors, which are, again, particularly well suited to rural areas; biodiesel production, especially from waste oil and algae reactors; and, most important, low-flow microhydro generators, which are small and affordable devices that individuals can buy and place in running water to generate electricity for themselves. Even with the dramatically lower price of solar power these days, the biggest, most efficient means of personal energy production is in the area of micro-hydro, but of course, that’s only true if you live next to a stream or river. Micro-hydro is effective, but self-limiting.

Nonetheless, all of these technologies have a role to play in our energy future, and increasingly, the people of the United States are realizing that taking a small measure of control over their own energy production is extremely empowering and liberating.

The Big Picture

The facts are undeniable. The United States is on its way to virtual energy independence. Our vast shale resources, a renewed interest in off-shore drilling, and increasingly competitive prices in solar are the trio of pillars supporting this new possibility.

In 1973, President Richard Nixon spoke of attempting to achieve American energy independence. The words he spoke were meant to evoke the same level of excitement and enthusiasm as Kennedy’s “We choose to go to the moon” speech more than a decade earlier.

Here is what President Nixon said, after asking for Americans to universally make sacrifices in energy consumption due to the Oil embargo crisis:

Let me conclude by restating our overall objective. It can be summed up in one word that best characterizes this Nation and its essential nature. That word is “independence.” From its beginning 200 years ago, throughout its history, America has made great sacrifices of blood and also of treasure to achieve and maintain its independence. In the last third of this century, our independence will depend on maintaining and achieving self-sufficiency in energy.

For the first time since 1974, the goal to achieve energy independence is in our sights. We have the technology, infrastructure, market forces, and capital incentives for entrepreneurs to reach our respectable goal.