3 Key Drivers of Energy Independence

A decade ago, if you told someone that energy independence would be conceivable by 2020 they would have said you are crazy. Consumption was growing, production was shrinking, and there was no end in sight to oil imports.

Fast-forward to today and the Energy Information Administration is predicting that we'll be energy independent by 2030 and at the very least we should be the largest oil producer in the world by 2020.

Where we've been
Since the industrial revolution the consumption of oil has been rising at a seemingly non-stop rate for decades. Until the 1970s this wasn't a big problem because oil could be found easily in Texas, Oklahoma, and elsewhere around the country, so production grew with demand. In 1973, we imported just 34.8% of the 17.3 million barrels of oil supplied to the country each day.

By 2005, all of the easy oil was found in the Middle East, our oil production was declining, and consumption showed no signs of slowing. The country consumed 20.8 million barrels of oil every day and 60.3% of it came from overseas.

But that's when a few unforeseen events turned the U.S. from a hopeless consumer to a huge producer of oil and a leaner user at the same time. The price of oil skyrocketed to $140 per barrel, leaving consumers little choice but to abandon gas-guzzling SUVs for smaller or more fuel efficient options. The high price also made ultra-deepwater offshore drilling in the Gulf of Mexico economical and gave a newly refined technology called shale drilling a breath of life.

Since 2005, consumption in the U.S. has dropped 10.6% to 18.6 million barrels per day and because of increased production we now import only 41.7% of the oil we use. And there are three things that will help these trends accelerate.

Increase production
The factor that gets the most attention by the media is increased production, and rightfully so. Increased oil production creates jobs in the U.S., reduces our reliance on foreign oil, and keeps money flowing through the U.S. economy. Over the past few years the U.S. has done a surprisingly good job increasing production; this will be key going forward.

Source: U.S. Energy Information Administration

To keep production rising we actually need to see the price of oil remain fairly high. Shale drilling is still more expensive than conventional drilling because it's more complicated and therefore it demands a higher price. Costs are falling, but as we saw with natural gas this year, the price of the commodity being produced can only fall so far before drilling will stop.

With companies of every size from ExxonMobil (NYSE: XOM  ) to Chesapeake Energy (NYSE: CHK  ) to Quicksilver Resources (NYSE: KWK  ) transitioning as much capacity as possible from natural gas to oil production there's no reason the trend won't continue.

Increase efficiency
The discussion about fuel efficiency is often overlooked in the discussion of oil independence but it is just as important as supply. After all, if demand didn't exceed supply currently we wouldn't have this problem.

The good news is that our oil consumption has declined pretty dramatically since peaking in 2005, and we should see even more of a decline in the future.

Source: U.S. Energy Information Administration

The drop in demand in 2008 and 2009 can be directly attributed to the recession, not a great driver of decreased demand, but the drop over the past year can be tied to increasingly efficient vehicles. SUV sales dropped when the recession hit and manufacturers Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , Honda (NYSE: HMC  ) , and Toyota (NYSE: TM  ) are all focusing on efficiency. This is partly driven by consumer demand for more efficient vehicles, but the government is also pushing them in that direction.

The Obama administration recently finalized new fuel efficiency standards that will raise fleet efficiency to 54.5 miles per gallon by 2025. Momentum on the demand side will continue to drive lower oil usage in the future.

Alternatives will play a big role
They only play a bit role in our current transportation picture, where most oil is burned, but alternative fuels will begin playing a much larger role over the next few years. Clean Energy Fuels (Nasdaq: CLNE  ) , General Electric (NYSE: GE  ) , Chesapeake Energy (NYSE: CHK  ) , and others are playing a role in building an infrastructure of fueling stations for trucking fleets around the country. When Westport Innovations (Nasdaq: WPRT  ) begins rolling out a heavy duty engine next year this could take another bite out of demand.

Another alternative that will have an impact, albeit smaller, is the electric vehicle. EVs certainly haven't lived up to the lofty expectations of some, but as the range of these vehicles improves they will become a viable alternative.

The end of oil imports on the horizon
The three factors highlighted above will continue to drive the U.S. toward oil independence. We've already reduced the net import of foreign oil by 38% from 2005, which is an incredibly rapid rate for an economy as big as the U.S. The chart below should continue to see a downward trend well into the future.

Source: U.S. Energy Information Administration

The winners
When looking for winners in the energy independent future I like to focus on plays that aren't tied directly to the cost of oil, but instead benefit from increased production. Seadrill (NYSE: SDRL  ) and Transocean (NYSE: RIG  ) own drilling rigs that drill for oil offshore. With ultra-deepwater finds in the Gulf of Mexico and other locations around the world, these companies will continue to see high dayrates for rigs.

Onshore, I like companies moving oil from drilling locations to refineries and finally to customers. Enbridge (NYSE: ENB  ) and Kinder Morgan (NYSE: KMI  ) would be two solid plays here.

All four of the companies I've mentioned have well-established businesses and strong dividends but they aren't going to be growth stocks. For that I would turn to Clean Energy Fuels, who will provide growth as trucking fleets move to less-expensive natural gas and the movement toward alternative energy gains momentum. It's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.


Read/Post Comments (14) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2012, at 6:25 PM, thebergskins wrote:

    I would like to see information about the EPA's current position regarding the polution of the water supply as a result of the fracking process. Seems to have become a forgotten topic in recent months.

  • Report this Comment On November 30, 2012, at 7:10 PM, scitracker wrote:

    We would be "fuelish" to think we have solved our long term energy issues and concerns, just because technology has enabled us to locate and extract more gas and oil. The future of our economy, and our world, depends on creating more efficient, green, energy alternatives and greater conservation. Business, as short sighted, and focused on near term profits as they are, will not achieve these goals by themselves. Just as government needed to enforce higher fuel standards for car, enabling the US to reduce oil imports and overall oil demand, government will need to drive the change to green energy and conservation.

  • Report this Comment On November 30, 2012, at 8:13 PM, pfxg99 wrote:

    Another company playing a key role in the LNG as fuel infrastructure along with Clean Energy and Westport is Chart Industries (GTLS).

  • Report this Comment On December 01, 2012, at 9:11 AM, sevenheart wrote:

    Pollution of water from fracking is non-existent. Fracking is a method that was patented 60 years ago and has been used widely in spite of the current blather that this "new" technique of fracking is the reason we can produce so much more oil.

    Understand this- methane has existed in domestic wells for centuries, water wells are often drilled into formations containing organic materials that are it's origin. Only when a rig moves in do people get the lottery/lawsuit mentality and hysterically believe it's a new problem. Chesapeake finally took some initiative and automatically tested all domestic water wells for the presence of methane before bringing drill rigs in (Ohio and Pennsylvania) proving that methane was already present in water wells (as is-get this- deadly earth destroying CO2!!!!!) Gas and oil formations are typically almost 1 mile deeper than domestic water formations. At those depths the water produced is saline, a residual of the ancient oceans that made the creation of oil and gas possible.

    I'm fascinated by the assertion that most oil is burned to fuel SUV's when the within the industry that number ranges from 35-35% with the balance of oil being used to create fertilizers and a chemical feedstock- decline of these uses leading up to the recession are more likely the cause of decline in consumption than greater efficiency of automobiles.

    Oh well the paradigm is established, fracking destroys fresh water, oil destroys the planet, the only hope for the future is a windmill that produces no chemical feedstock and oh yes, never forget that big oil is only try to rob every human being of every penny they have so that they are easier to kill with corporate profits in spite of operating on large scale and smaller margins than almost every other industry in teh world.

  • Report this Comment On December 01, 2012, at 9:12 AM, sevenheart wrote:

    Correction 35-45%

  • Report this Comment On December 01, 2012, at 9:43 AM, ETFsRule wrote:

    sevenheart: No offense, but it sounds like you don't really understand the issue.

    Fracking involves the blasting of undisclosed chemicals, at high pressures, where they can easily reach the water supply. For example, this article explains some of the concerns:

    http://www.bloomberg.com/news/2012-11-30/frack-secrets-by-th...

    And, in tables 5.7 and 5.8 of this report they list some of the chemicals used in fracking:

    http://www.bloomberg.com/news/2012-11-30/frack-secrets-by-th...

    Many of these chemicals are well-known toxins and carcinogens.

  • Report this Comment On December 01, 2012, at 11:37 AM, mbugado wrote:

    Good to see people concerned with the bigger picture and not just money, although I love money, you need to look at the cost to our environment and have some respect for the place we all live in.

  • Report this Comment On December 03, 2012, at 5:38 PM, whereaminow wrote:

    ---> you need to look at the cost to our environment and have some respect for the place we all live in <---

    They don't care about the environment. It's just a political issue. Governments poison the water supply all the time and the watermelons never say a peep.

    David in Liberty

  • Report this Comment On December 03, 2012, at 6:47 PM, Darwood11 wrote:

    It's impossible to predict the future. Politicians of all stripes have been trumpeting "energy independence" for the primary purpose of collecting votes since the 1970s.

    M. King Hubbert initially predicted in 1974 that peak oil would occur in 1995 "if current trends continue."

    That's the rub. We can't predict the sources and the consumption of energy.

    Can we be energy independent? Possibly. But I wouldn't hold my breath. There are a lot of road blocks, and as the WSJ noted in an article on global shale oil, it's not an easy or predictable task.

  • Report this Comment On December 03, 2012, at 11:37 PM, bsahli wrote:

    Please indicate units on your charts.

  • Report this Comment On December 03, 2012, at 11:49 PM, TMFFlushDraw wrote:

    @bsahli

    Wow, huge oversight on my part. Here are the units.

    Chart 1: Thousand barrels per month.

    Charts 2, 3: Thousand barrels per day.

    Travis Hoium

  • Report this Comment On December 04, 2012, at 2:02 AM, TerryHogan wrote:

    I guess I'm splitting hairs, but I think the phrasing of "Energy Independence" that is so often used is misleading. The US has enough coal to easily be energy independent. For that matter, there's probably enough sunshine in Arizona for energy independence. The problem is the form of energy that consumers are stuck on. It's really oil that we're all talking about.

    I personally think that the Saudi's, Venezuela, and us Albertans should be selling it as fast as we can, or we could find ourselves without a market before we can get rid of all our reserves. Sure electric vehicles still suck, but that won't last forever, I mean a Tesla ain't too bad. And there's some decent natgas engines out there.

    Full disclosure - I drive an F-150 supercrew and routinely let it warm up for 15 minutes before I get in it. (I'm trying to help keep the Saudi's from having to downsize their private jets)

  • Report this Comment On December 04, 2012, at 7:03 AM, gsned57 wrote:

    Hey TerryHogan, If you don't actually use your F-150 to haul large things daily take a test drive of the 2013 Volt. Please save your opinion that EV's suck at this point until you've given it a real test drive. Handles similar to entry BMW and you can program it to precondition to a certain temperature at a certain time so you won't even have to go outside to start it in the morning to prewarm it. Most folks who own them go 1-2 years between oil changes and months between fill ups saving plenty of time (I'll sit at the gas station for 15 minutes filling up my pop's F150.

    As for your first point with your logic everyone is energy independent, they just don't have to use any power at all and there you go. If the Iranians decided to do something stupid and block the straight of Hormez I don't think sticking a lump of coal in your gas tank will get you too far. On the other hand if you put solar panels on your house and had a volt you'd have a 40 mile leash but still be mobile.

    My motives aren't so much CO2 and Green as much as energy independence and personal independence. I'm all for American made and American fueled. I also detest exporting money to dictators and terrorists to simply burn a product that they did virtually nothing to produce save occupying some land.

  • Report this Comment On December 04, 2012, at 12:59 PM, CluckChicken wrote:

    I like the sound of energy independence more then I actually like the idea of it. I know how silly that sounds but I think it is more important for the US to import about 20% of its energy needs (not necessarily just oil). This can be a big club in terms of diplomatic work.

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