The Complex New World of Energy Security
U.S. production and exports of petroleum-related commodities hit an all-time high in the fall of 2022 while plans to deploy alternative energy inside the U.S. are similarly at the most ambitious in U.S. history. In its latest available data, the U.S. Energy Information Administration (EIA) reported that total U.S. petroleum and biofuels output hit 21 million barrels a day, a new record, roughly 800,000 b/d more than the previous record prior to the start of the COVID-19 pandemic. The breakdown includes 12.4 million b/d of crude oil and condensate, over 6.1 million b/d of natural gas liquids (NGLs), more than 1.2 million b/d of biofuels and other alternatives, and another 1.2 million b/d in processing volume gains from the refining process.
The high U.S. exports come against evidence that U.S. domestic gasoline use has stopped growing. Forecasts suggest U.S. gasoline use will decline further in 2023 and beyond as the fuel economy of U.S. cars continues to improve and the number of electric vehicles on the road expands. In 2022, electric vehicles and hybrid electric vehicles reached 17 percent of American auto sales. Bloomberg New Energy Finance estimates EV adoption has shaved oil demand by 2 million b/d globally in 2022 in a trend expected to continue.
That begs the question — is the U.S. one of the few economies not facing an energy crisis, and if so, why were U.S. energy prices so high last summer?
There is no question U.S. energy helped fill the gap left in global markets by the cutoffs of Russian natural gas to Europe last year. U.S. LNG exports averaged close to 10 million cubic meters a month in 2022, up 137 percent from 4.6 mcm in 2021. New U.S. LNG export capacity that came online in 2022 at Sabine Pass and Calcasieu Pass helped increase the level of LNG available for export. The United States supplied over half of all of Europe’s imported LNG, alongside small boosts to pipeline shipments from Norway and Algeria. A hot summer that increased power sector demand in the United States, combined with the rising LNG exports, helped push U.S. natural gas prices to $6.45 per mmbtu average for 2022, the highest level since 2008, despite record domestic U.S. natural gas production, the EIA report showed. In other words, the supply shock to Europe opened a larger export window and thereby transmitted higher global prices into the U.S. domestic market. U.S. natural gas prices have since eased recently amid an unexpectedly mild winter in both the U.S. and Europe. So far, Europe’s large natural gas inventory buildup last summer has helped it weather what looks to be a potentially permanent loss of almost all of its previous pipeline natural gas supplies from Russia — a supply shock that is roughly the equivalent amount of natural gas as 15 to 20 percent of the volume of total global LNG trade.
Similarly, U.S. crude oil exports hit a high of 5.1 million b/d in October, partly on the back of demand from Europe. And, Europe’s imports of diesel and heating oil from the United States in December 2022 also reached a two year high, as Europe prepared to end diesel imports from Russia.
The profile for the U.S. refining sector was different for most of 2022, however. Prior to December 2022, European refined product imports from the U.S. were, in fact, not soaring. Instead, for gasoline, there was less apparent demand pull from foreign markets and surprisingly, U.S. gasoline exports topped close to 1 million b/d last summer and into the early fall. The unusually large shipments of refined products and crude oil from U.S. shores raised eyebrows among politicians in Washington, D.C. and led to renewed discussions about U.S. energy security. This is despite the fact that the U.S. achieved net oil exporter status in 2022 by a growing margin. In October 2022, the latest month for available statistics, EIA reported that the United States had consolidated its position as net oil exporter to the tune of a net positive balance of 3 million b/d, that is, total exports were 3 million b/d higher than net imports. Concerns about rising domestic fuel costs prompted U.S. Secretary of Energy Jennifer Granholm to send a letter to large U.S. refiners about the need to ensure domestic inventories of diesel fuel and gasoline were adequate instead of dumping products into global markets. U.S. gasoline and crude oil inventories gained ground in November 2022.
The record level of overall U.S. petroleum and natural gas exports reframes false narratives that somehow slower growth from shale fields is thwarting America’s role in promoting energy security in global energy markets. The real story is that the United States set a new recent record for any single country producer. In the fall of 2022, the United States produced total energy “liquids” volumes that are the equivalent of the combined crude oil production of both Russia and Saudi Arabia. U.S. policymakers debated setting regulatory standards for minimum inventory levels for refiners — a policy used in other countries including Europe- to potentially shield American consumers from supply outages during periods of high export demand, but so far, this kind of concrete energy security regulation has not attained any traction in Washington.
The bottom line is that U.S. consumers, much like their European counterparts, have wound up paying higher energy prices to maintain access to supplies amid global supply disruptions and competition for available cargoes. Consumers in other less wealthy nations, like Pakistan and India, last year found these high globalized LNG prices to be prohibitively expensive, and their utilities cut purchases, creating price-related electricity outages in some regions.
High global oil and gas prices, ultimately, have caused many countries to reevaluate their energy dependence on foreign imports and brought energy security back as a top priority in capitals around the world. This is prompting greater interest in clean and alternative energy solutions which tend to exploit domestic resources like wind and solar or nuclear power and generally help countries produce energy within their borders. Last year, clean energy investment set a $1.1 trillion record and equaled the level of global investment in fossil fuels, according to Bloomberg New Energy Finance, with the bulk of the funding targeting renewable energy and electrified transport.
Although media reports have often focused on the turn back to coal, many developing countries are also doubling down on clean energy and nuclear power. India, for example, is doubling down on renewable energy and looking to build a hydrogen economy for heavy industry and deemphasizing liquefied natural gas (LNG) in its future energy mix given the recent volatility of prices and supplies. In Europe, countries are actively seeking alternatives to pipeline gas, with eastern European nations increasingly focused on new nuclear plants. Several African countries, like Ethiopia, are fast-tracking the development of major hydroelectric assets.
Still, global climate finance remains a barrier for many countries in the global south and major electricity sector reforms will be needed to attract more foreign direct investment into clean energy development in Africa and Southeast Asia. In recent years, China has been a lender of last resort for indebted nations who might lack foreign exchange or have limited access to global finance to pursue energy security policies and increased investment in renewable energy. But more recently, China’s Belt and Road infrastructure finance may also be losing momentum amid the global power’s recent economic slowdown.
Eventually, the Inflation Reduction Act of 2022 could position the United States to play an even greater role in global energy security by positioning it to better assist other countries seeking increased renewable energy and nuclear power infrastructure to meet rising energy needs for economic development. The Biden administration has pursued such a framework by promoting Just Energy Transition Partnerships, first with South Africa, and more recently with Indonesia, and working with U.S. companies to foster civilian nuclear energy trade in Eastern Europe and beyond.
Still, the United States can only do so much and what’s needed will be a major overhaul of climate finance to address the fact that wealthy nations appear to be outbidding developing economies for the needed inputs to energy security, whether that is existing oil and gas traded cargoes or the metals and equipment for renewable energy projects. Leaders from developing nations worry that new clean energy stimulus packages which emphasize domestic manufacturing and secure supply chains in the U.S., Europe, China, South Korea, Japan, and India, will create an even wider technology knowledge gap for clean energy deployment and innovation, leaving countries further behind in energy security. Monetary tightening in the U.S. and other developed economies is also worsening the problem by driving up the cost of debt in many less developed nations. New institutional frameworks like the Just Energy Transition Partnerships, blended finance, and loss and damage funds hold out promise for financing solutions to the problem of climate equity in global energy security financing but increased global financial sector innovation is needed to bring energy security improvements beyond the developed world.