The Fuse

Obama: The Accidental Energy Security President

by Matt Piotrowski | July 18, 2016

Like presidents before him dating back to Richard Nixon, Barack Obama pledged to reduce dependence on crude oil imports and sever the country’s reliance on OPEC oil. “For the sake of our security—and for every American family that is paying the price at the pump—we must end this dependence on foreign oil,” he said on the campaign trail in 2008. “We will also build an alliance of oil-importing nations and work together to reduce our demand, and to break the grip of OPEC on the global economy.”

But unlike others, Obama saw overall energy security improve markedly during his presidency. Crude imports have fallen dramatically during his time in office, demand for oil has taken a hit, and the country’s trade balance has improved significantly due largely to a decrease in imports and sharp uptick in exports of refined petroleum products.

Obama’s legacy is, however, complicated, and full of irony and contradictions. He has been seen as an anti-oil politician, yet domestic production grew at its fastest rate ever under his watch.

His legacy is, however, complicated, and full of irony and contradictions. Obama has been seen as an anti-oil politician, yet domestic production grew at its fastest rate ever under his watch. Most output increases occurred on private lands, meaning he had very little to do with the growth. However, he also didn’t add regulations to stymie the boom. Moreover, he gave the industry one of its biggest legislative victories in decades with the lifting of the ban on crude exports. On the demand side, oil consumption has fallen from its peak in 2007, but again his policies weren’t the main reason for the decline: It was rather the result of aftershocks of the 2008-9 financial crisis. His largest achievement in reducing demand, the tightening of fuel economy standards, is now threatened by low oil prices and a mid-term review that could alter the regulations. The complete long-term benefits are far from certain.

Increasing production & decreasing imports

With the rapid rise in U.S. output, crude imports took a major hit, bringing about massive energy security gains.

From the end of last decade, the fracking boom took off, boosting U.S. domestic oil production from 5 million barrels per day (mbd) in 2008 to an annual average of 9.4 mbd in 2015. The main areas of the output increases include the Permian and Eagle Ford in Texas and the Bakken in North Dakota. Obama had nothing to do with this output surge, but he also didn’t put together forceful regulations at the federal level to undermine the growth. His main attempt to regulate fracking included rules for activity federal lands, which would affect only a fraction of overall U.S. production, but the law was blocked by a federal judge.

With the rapid rise in U.S. output, crude imports took a major hit, bringing about massive energy security gains. Last year, crude imports averaged 7.3 mbd, down 2.4 mbd, or 25 percent, from 2008, with volumes from OPEC countries cut in half during that time.

Despite his repeated opposition to allowing unfettered crude exports, he eventually struck a deal with Republicans late last year. This deal, economists argue, should help shale grow over time and has already allowed producers to tap markets outside the U.S. But it’s the growth in refined product exports over the past five years or so that has greatly improved U.S. energy security and helped make it an energy superpower. As a result of this sharp rise, net imports of crude and products were cut massively in the past eight years, falling by 60 percent.

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Critics will note that he did not do enough to bolster supply on federal lands, the main area where he could’ve made a difference. One big outcry came with his flip-flop on opening the Atlantic Outer Continental Shelf (OCS), which went against his “all-of-the-above” energy philosophy. While allowing testing and drilling in the Atlantic would not have impacted current oil market dynamics, it would affect future domestic supply. Moreover, Obama’s dropped the ball with the Energy Security Trust Fund, which he advocated in his 2013 State of the Union address. The Fund sought to bring in some $2 billion, from royalties on oil and gas development, for research on alternatives in the transportation sector. This initiative, unfortunately, failed to be realized.

Fuel efficiency & EVs

The Energy Independence and Security Act of 2007, signed into law by President George W. Bush, established new fuel economy standards of 35 miles per gallon for cars and light trucks through 2020. They were tightened by Obama from 2009-12 to 54.5 mpg by 2025, and he also imposed news standards for heavy-duty trucks. The regulations will go a long way over the longer term in reducing oil demand, but it’s unclear if the ambitious goals will be met given pushback from the auto industry and consumers preferring big cars again.

In 2008, Obama called for 1 million electric cars on the road by 2015 in an effort to reduce oil consumption, but the U.S. never achieved that goal, because of limited consumer acceptance, high initial costs, and plummeting gasoline prices. Even so, Obama put forth or extended initiatives for further electrification of the vehicle fleet with tax credits for EVs, broader research into batteries and energy storage, and programs to award cities that have been leaders in building EV infrastructure.

Demand declined during Obama’s time in office, helping slice the need for imports. How much of that trend is the result of his policies is difficult to determine.

Against the backdrop of increasing fuel efficiency, demand declined during Obama’s time in office, helping slice the need for imports. Again, how much of that trend is the result of his policies and how much occurred due to slower economic growth in the wake of the financial crisis is difficult to determine. Last year, total oil demand averaged 19.3 mbd, up from its low of 18.5 mbd in 2012, but still down 100,000 b/d versus the previous peak in 2008. Average fuel economy for new cars and trucks rose by 25 percent from 2008-2014, but many other factors, such as disposable income, pump prices, and even weather, define how much oil is consumed. Fuel economy is being put to the test now that retail prices are low and consumers are driving more—VMT has hit records—and purchasing less efficient automobiles.

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Biofuels and Keystone

The penetration of biofuels and the fight over the Keystone XL pipeline tended to dominated headlines during the Obama years, and will be long discussed and fought over even when he leaves office in January. These issues became red herrings and deflected discussions over more important issues with regards to energy security. Biofuels advocates are dismayed that current levels are below what was originally mandated. But biofuels are not the energy security solution once envisaged, and the gasoline market is not large enough to increase the amount of blended ethanol. U.S. demand for gasoline, which is mandated to be blended with 10 percent ethanol, fell steadily for years and has not yet returned to previous peak levels in 2007, although that level will be challenged this year. After growing rapidly from 2005-2010, ethanol output in the U.S. has mostly flat-lined, inching up only slightly, as it has been undermined by gasoline demand performing below original expectations. In other words, ethanol has reached a blend wall—the peak level amount that can be absorbed the by the gasoline market.

Many will center his energy legacy around the fight over the Keystone XL, which planned to haul crude from the Canadian tar sands to U.S. refineries, and his rejection of it on environmental grounds. But one pipeline rejection does not define a legacy. Despite the decision, oil produced in Canada is still reaching the market in large volumes via pipeline and rail. The U.S.’ neighbor to the north is shipping more than 3 mbd to the U.S., up 1.2 mbd since 2008, making up more than 40 percent of the country’s imports.

Legacy: TBD

Most successes and failures of presidents can’t be determined for years, or even decades, after they leave office. So will be the case with Obama.

The Obama administration saw two extraordinarily different situations with regards to energy security over the past eight years. On one hand, high oil prices spurred positive changes and enhanced energy security through stronger domestic production and lower demand. On the other, during the tail end of his time in office, weak prices boosted consumers’ disposable income and supported economic growth. Meanwhile, shale has been battered by lower prices, consumption has rebounded, and imports are back on the rise. It’s unclear what the next president’s policy agenda will be and what changes in the global oil market will occur in the short and long term to help define or alter Obama’s legacy. Most successes and failures of presidents can’t be determined for years, or even decades, after they leave office. So will be the case with Obama.

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