U.S., Mexico and Canada Could Become Energy Independent

April 17, 2013— -- Just seven years after President George W. Bush lamented the United States' addiction to foreign oil, we are on the verge of energy independence. The United States and Canada are in the midst of a boom in oil and gas production at the same time that U.S. fuel consumption is falling. The result is turning energy markets on their heads.

Add to that the potential for energy reform in Mexico, which many believe would unleash a surge in exploration and production, and North America is positioned to become a global energy powerhouse.

U.S. oil production is at its highest level in 20 years, while its oil demand is at a 17-year low. According to a recent Citigroup report, in just five years the U.S. may no longer need to import oil from any source but Canada.

Driving the North American oil boom are technological innovation and increased investment. New production techniques like horizontal drilling and hydraulic fracturing, or "fracking", have allowed producers to extract oil and gas from rock formations that were previously thought to be impenetrable. Oil and gas production has jumped in states like North Dakota, Ohio and Pennsylvania, which together are producing 1.5 million barrels of oil a day. That total rivals the output of major producers like Venezuela, which is currently exporting around 1.6 million barrels per day.

What would North American energy independence actually mean?

In the most basic terms, the U.S. would no longer have to rely on importing oil from countries that are hostile to its interests. Continued increases in production would also decrease global prices which would reduce the power of the Organization of the Petroleum Exporting Countries (OPEC), which includes top producers like Saudi Arabia, Iran and Venezuela.

According to Ed Morse, Citigroup's Head of Commodities Research, the average price of a barrel of oil could drop to the $70-$90 range (prices are currently around $95 per barrel, down from $112 per barrel in 2012).

The U.S. economy would be a clear winner. The boom has already resulted in lower natural gas prices, boosting U.S. industry and helping the economy rebound from the Great Recession. The reduced cost of oil would also benefit the non-oil producers in Central America and the Caribbean.

Mexico, meanwhile, is in a more precarious position. If it is able to better integrate itself in the U.S.-Canadian energy market and open up its state-run oil industry, it could reap the benefits of lower prices and increased investment. There are a lot of wells on the Mexican side of the Gulf of Mexico that are just waiting to be tapped.

On the other hand, Mexican oil exports to the U.S. are declining thanks to the increased U.S. production, and without significant investment in production and infrastructure such as pipelines, it will fail to capitalize on the U.S.-Canada boom.

In the Americas, the biggest loser would be Venezuela. Recent estimates suggest that the Venezuelan government needs oil prices of around $110 per barrel to balance its budget. If prices drop to the $70-$90 per barrel range, the new government would have to cut spending.

On top of that, the U.S. currently imports around 900,000 barrels per day from Venezuela, but this number has been on a steady decline since 2004. It could drop to zero if the Keystone Pipeline and its extensions, which would connect Canada to Houston, are completed. The U.S. is already exporting refined oil products to Venezuela, and if imports from Venezuela drop further, Venezuela could become a net importer of oil from the US -- something unthinkable at the time of President Bush's oil addiction speech.

Another loser is the environment. Fracking has made natural gas cheaper than coal and led to an increase in the number of natural gas power plants, which are much cleaner than coal plants. This has helped reduce carbon emissions but the success of fracking has caused the U.S. to double-down on its investment in fossil fuels, and cheaper oil and gas are reducing the pressure to find alternatives.

Additionally, the long-term environmental and health effects of fracking are uncertain. People in main fracking areas like Montana, North Dakota and Ohio have complained of water contamination, bizarre health effects, flaming methane shooting from their water faucets and even mini-earthquakes.

The North American oil boom and its promise of energy independence do come with a caveat. Michael Makovsky, a Pentagon official in the most recent Bush administration, summed it up well: "If we are going to be a consumer of oil, it's better that it be our oil rather than from the Middle East. But the oil market is still global, and the North American oil market will still be greatly impacted by developments in the Middle East," he told The New York Times.

Being dependent on the Middle East isn't the same as being affected by it, and there's no doubt the U.S. will happily trade the former for the latter.