Newfound U.S. Oil Wealth Won’t Lower Gas Prices

Technology for extracting previously inaccessible oil and gas resources in the United States, along with increases in biofuels production and improved vehicle efficiency, could lead to a situation where the United States produces as much energy as it uses by 2035, according to the recently released World Energy Outlook 2012 from the International Energy Agency (see “Natural Gas Changes the Energy Map”). By 2020, the U.S. will surpass Saudi Arabia as the world’s largest oil producer, although Saudi Arabia is expected to catch up within a few years.

The report echoes several in recent months that have pointed to the possibilitly of North American energy independence.  Yet although the report says the U.S. will be “all but self-sufficient” by 2035, that doesn’t necessarily mean prices for will go down. Because oil is easy to ship around the world, the price for oil is set by global demand, and demand in places such as India and China is expected to keep growing. That’s in part because of subsidies for fossil fuels, which rose 30 percent between 2010 and 2011 to reach $523 billion, the report says. (Many governments around the world are likely to reduce fossil fuel subsidies as they become increasingly expensive.) 

The IEA says subsidies to renewable energy came to $88 billion in 2011. It expects those subsidies to increase to about $240 billion per year by 2035 and for electricity generation from renewable sources to triple by then. Added renewable energy will increase electricity prices by 15 percent electricity in the European Union because of renewable subsidies. Increased costs of fossil fuels is also expected to increase electricity prices.

Hydraulic fracturing and horizontal drilling are largely responsible for the increase in oil and gas production in the United States. The technologies could also increase production elsewhere, although applying it in places like China, where much of the geology is different, could be harder than in the U.S. Cheap natural gas could make it harder for sources of renewable energy such as solar and wind to compete (see “King Natural Gas”).