America’s Energy Revolution Continues

It is hard to understate the revolution in our energy outlook over the last two decades.

Roll back the timeline to around 2006, and you find America had to import nearly a quarter of its total primary energy supply in one form or another. This was chiefly a story of oil and natural gas. In 2006, we were thought to be on the brink of "peak oil," soon to find expression (by 2008) in oil reaching $150 a barrel, with expectations that it might soon reach $200 a barrel. Today, oil is around $60, with thoughts that a current oversupply may push the price down to $50 before long.

Back then, however, American oil production was in a long decline from its peak of 9.6 million barrels per day in 1970 to 5 million by 2008, with further declines expected. The U.S. was importing nearly 15 million barrels a day, with one quarter of those coming from the Middle East (our leading foreign suppliers were Canada and Mexico). Today, American production has rebounded to over 13 million barrels per day, and the U.S., having exported zero oil for nearly 30 years now, exports around 4 million barrels a day. Oil imports from the Middle East have declined from their peak of 2.7 million barrels per day in 2001 to under 700,000 barrels per day. No one predicted this. People mocked Sarah Palin when she chanted "drill, baby, drill" in 2008, but no one is laughing now, nor is anyone admitting they ever uttered the phrase "peak oil."

The outlook for domestic natural gas 20 years ago was equally grim. The wellhead price more than doubled between 2000 and 2005 to around $7 per thousand cubic feet, and most analysts forecast that by the year 2025 the United States would need to import up to 20 percent of its natural gas (from guess where), while petrochemical companies were making plans to offshore their production to countries with cheap and abundant gas, such as Qatar, which offered it for $2 per thousand cu. ft. or less. Construction began on several large liquid natural gas (LNG) import terminals to meet the anticipated increase in demand for imported gas. Today, America is awash in so much cheap gas — around $3 per thousand cu. ft. wholesale — that we have become a gas exporting nation, and those LNG import facilities have been repurposed into LNG export facilities. And our major chemical companies canceled plans for most of their proposed overseas facilities.

The United States is now in the enviable position of producing a surplus of primary energy — perhaps the only major industrial nation that does so aside from Russia, Canada, and tiny Norway. In retrospect, it was roughly 20 years ago that America's energy prospects were starting to turn around, though no one in Washington was aware of it at the time, and that's likely a good thing, because if the political class knew of the large transformation that was underway, they would surely have tried to stop it. In fact, there has seldom been such a significant change in any large area of economic activity toward which public policy was more irrelevant, when it was not in fact a deliberate hindrance. Twenty years ago, energy discourse was awash in buzzwords and concepts such as "smart grid" and "hydrogen highway." These ideas now seem as quaint and obsolete as rotary dial telephones. And the more recent "Net-Zero" slogan seems to be dying fast.

The most common one-word explanation for this startling turnaround in American oil and gas production is "fracking," short for hydraulic fracturing. In case you've been hiding under an un-fracked rock, hydraulic fracturing involves injecting high pressure fluid into tight cracks deep underground to release oil and gas previously inaccessible to conventional oil and gas drilling technology. However, fracking is not a new technology; it has been used for "enhanced oil recovery" in older conventional oil and gas wells for more than 50 years. What was new 20 years ago were breakthroughs in directional drilling technology and a more detailed grasp of underground fluid dynamics, which enabled cost-effective production of previously inaccessible resources.

Much of the new oil and gas production occurred on private or state land, largely immune from federal permitting hurdles or other bureaucratic nightmares. Oil production continued to increase during the Biden Administration, despite the administration's open hostility toward hydrocarbon energy, demonstrating the unstoppable momentum of private-sector technological progress. Many of the main challenges to our energy systems involve infrastructure, such as pipelines and electricity transmission lines, that remain subject to litigation and bureaucratic obstacles.

While energy policy, since the initial "energy crisis" of the 1970s, has been obsessed with promoting non-hydrocarbon energy with limited effect, by President Barack Obama's second term, the new catchphrase was "all of the above" energy, which was a tacit acceptance that hydrocarbons remained the primary source of American energy. Cheap natural gas was a much larger factor than subsidies and mandates for "renewables" for the significant decline in U.S. greenhouse gas emissions since their 2005 peak, as cheap gas outcompeted old coal-fired power plants in the marketplace.

This favorable new energy equilibrium occurred when total U.S. energy demand was declining slightly, even as population and economic growth continued, reflecting the steady increase in economy-wide energy efficiency. But this may be about to change. The rise of power-hungry Artificial Intelligence (AI) infrastructure is already imposing significant new demand for electricity. (Meta's proposal for Ohio data centers alone will need 10 percent of Ohio's current generation capacity.) This is only expected to increase further from here. The concentrated electricity demand of hyper-scaled data centers is difficult to meet with wind and solar power, even augmented by batteries.

So high is the demand for cheap natural gas plants that the backlog for new gas turbines is several years long, and suddenly there is a mad scramble for nuclear energy. In addition to reopening some mothballed nuclear plants, AI demand is seeking to jump-start a new generation of small modular reactors (SMRs), which have long been contemplated. There are still many difficulties with nuclear power: our large reactors (of which the U.S. has built only one in the last 40 years) still cost too much to build, while SMR startup companies need some firm orders if they are to take the next step of beginning production. And that assumes the federal regulatory process for licensing nuclear plants can be adapted quickly from large to small reactors.

Consumer electricity costs have risen sharply in recent years after years of relative price stability, and amid newfound concern for "affordability" and "abundance liberalism," there will also need to be changes to the electricity market's regulatory structure as the necessary expansion of electricity supply for AI proceeds. At the same time, the climate-driven mania to "electrify everything" (with renewables alone) is likely to go dormant for the time being. Both Ford and General Motors are taking multi-billion dollar write-offs for their premature overinvestment in the limited market for electric cars and trucks and hopefully have learned not to make politically-driven investment commitments.

Possible surprises? There continue to be headlines about progress in fusion energy, giving rise to the cynical quip that fusion power has been ten years away for the last fifty years. But maybe somebody is going to make it possible and change human energy potential by the single biggest leap since the invention of the steam engine.  

Steven F. Hayward is visiting professor at Pepperdine University's School of Public Policy.