Every year the federal government publishes the Annual Energy Outlook (AEO). Fight your way through the drone of bureaucratic prose and you’ll discover very specific forecasts for hundreds of energy prices and quantities over the next 30 years. Among its many predictions, this year’s report claims that in 2050 the price of Brent Crude will be $107.94 per barrel.
It’s hard to know whether the authors are doing the bidding of some Matrix-like computer or whether they offer this level of specificity as a kind of inside joke – is $107.94 more believable than $108? But of course no one takes this faux precision seriously. For lots of fundamental reasons, energy prices are nearly impossible to predict. Economists have a hard time figuring out what’s going to happen next month, let alone in 30 years.
But the AEO is still worth reading. In fact, the AEO has been spectacularly spot-on about one critical forecast: More than five years ago they predicted that, today, the U.S. would not be fighting a bloody war in the middle of a terrible recession.
They didn’t present it quite so boldly – they didn’t come right out and say, “We won’t have a war” – but that was the intended meaning of their forecast. A few years ago, those faceless economists laboring away in the bureaucratic basements at the Department of Energy came to a realization: They figured out that radical new technologies on both the demand and the supply side would fundamentally alter the American economy by shifting the role that energy plays in it.
Energy conservation used to mean nagging your kids about turning out the lights. But, as the AEO quite accurately predicted, technology has dramatically reduced energy demand. Our proliferation of microchips and circuit boards isn’t sucking down electricity, fortunately; these devices are telling other energy-powered gizmos how to be more efficient. Your car is basically a computer with an engine. If it weren’t, your fuel mileage would be about 50 percent higher than it is today.
In part because of massive, tech-enabled improvements in energy efficiency, the 2019 AEO forecasts that between now and 2040, the economy will grow 10 times faster than the demand for energy. (Their models predict that if GDP grows at 1.9 percent per year, energy demand will increase by only 0.2 percent per year.)
On the supply side, the AEO documented the revolution in how oil and gas is produced. In the oil patch, “tight oil” describes light, sweet crude – the best kind – embedded in shale or sandstone. Geologists long suspected such formations were full of oil, but until the fracking revolution, no one knew how to get the valuable substance out. We do now. In 2010, tight oil represented about 15 percent of U.S. production. In 2015, it was slightly over 50 percent, and the AEO predicts it will represent almost two-thirds of oil production by the end of this decade. This is oil and natural gas we otherwise would have bought from foreigners.
There’s nothing wrong with buying things from foreigners – provided you’re not buying essential stuff from unstable trading partners. Unfortunately, that’s exactly what the U.S. was doing before the technological revolution in energy. In 1973, the U.S. imported over 6 million barrels of oil per day, much of it from the Middle East. When the Yom Kippur War broke out that October, the resulting oil embargo increased prices by almost 400 percent. That was followed by a recession and a ramp-up of political and military involvement in that troubled region.
Contrast that with what happened this past September, when a drone strike on Saudi oil facilities removed almost 6 million barrels per day from world production. In the first full day of trading after the attack, prices went up by about 13 percent. But that was a one-day wonder, and markets quickly figured out that there was plenty of oil sloshing around the world. Prices are now a bit lower than they were a couple of days before the attack.
None of this means that America is now an energy island in a stormy sea. We should take bipartisan joy in the fact that our scientists and engineers have made us more secure. That said, global energy markets still matter in two crucial ways.
First, energy is a globally traded commodity, which means we pay about the same price as everyone else in the world. If something sends world prices soaring, Americans will still have access to domestically produced energy but at a higher price. (There are, by the way, a few ill-informed politicians who want to try to isolate American energy markets by limiting exports. For reasons too complex to explain here, this is a spectacularly bad idea that probably wouldn’t work anyway).
The second, more important point is that energy is still critical to global economic growth and America is still part of the global economy. American energy independence means that chaos in world energy markets won’t disrupt our access to energy, but a major disruption caused by, say, a war in the Middle East would have a huge impact on important allies and trading partners such as Japan and the European Union. If global energy disruptions send important parts of the world into recession, the U.S. will suffer.
There’s one more thing about those AEO reports that merit praise: In their own quiet way the mid-level civil servants at the Department of Energy are issuing a bipartisan challenge to the energy ideologues. On the progressive left, many pundits and politicians describe fracking as a kind of uniquely malevolent force without any redeeming social value. On the right, energy conservation is often derided as either a fantasy of tea-sipping, bird-watching environmentalists or a sinister attempt to insert the government into our ordinary lives. The report makes it clear that without fracking and energy conservation, we would never have achieved the energy independence we enjoy today.
Memo to the Department of Energy: Thanks for letting us know.
Michael L. Davis is a clinical professor of economics at the Cox School of Business at Southern Methodist University in Dallas, where he specializes in the intersection of government and business.