Continued unrest in the Middle East has amplified concerns over America’s heavy reliance on foreign oil to satisfy growing energy needs. Until recently, the reality of a prolonged international crisis and its impact on the US oil market was an afterthought for many industry experts. Over the past few months, supply fears have played out in the markets, where crude oil prices returned to their highest levels since 2008, surpassing the US $120/bbl mark. And gasoline prices, which are nearing the $5 mark in some areas of the country, have put a hefty price tag on global supply issues for US consumers.

Experts agree that limited oil exports from the Middle East are fueling the rise in crude oil prices, which are likely to rise even more as summer approaches. Due to supply interruptions in Libya, Saudi Arabia is increasing its oil production to more than 9 MMbbl/d, a rate that is unlikely to remain sustainable, especially if interruptions continue to spread throughout surrounding countries.

Although oil remains a primary source of energy worldwide, these heightened supply fears spurred by recent disruptions in production have increased the urgency for the US to find both short- and long-term solutions to an oil shortfall.

During the March CERA (Cambridge Energy Research Associates) Week conference, industry executives discussed US supply concerns and the significant pressure prolonged production interruptions have on the global oil industry. They also addressed the longer-term implications: that oil supply over the next 30 years is unlikely to match the 50% increase seen during the past 30 years. This could pose a considerable problem for the global energy industry because worldwide demand is expected to increase by 40% over the next 20 years.

Libya’s state-owned oil company controls most of the country’s production, but foreign oil companies help sustain its output through joint ventures. This graph shows the production of top international companies in thousands of barrels per day. (Sources: Company reports, US Energy Information Administration, Reuters)

Attempts to increase supply

In the past decade, the industry focused on deepwater drilling as a short-term solution to the threat of an oil shortfall. At the outset, CERA experts predicted an additional 800,000 b/d to be extracted from deepwater wells by 2013. The Deepwater Horizon incident in 2010 has raised major questions about the risks affiliated with the industry’s expanding frontiers, specifically in deep water. The US E&P industry, which prior to the spill produced only 8% of the oil used nationally, is now operating at only 81% of capacity.

During the past year, the US has taken a series of steps to lessen its oil reliance and move the country in a self-sustainable direction. In his State of the Union address, President Obama outlined a clean energy standard that aims to have 80% of the country’s electricity needs satisfied by clean energy sources like solar, wind, nuclear, and natural gas by 2035. Energy executives agree that moving the country toward clean energy is a step in the right direction; however, this process is expected to take at least two to three decades to implement and build the appropriate infrastructure necessary to meet the greater needs of the US population.

The 23-year time horizon of green energy infrastructure development presents a significant hurdle for the industry. Oil and gas companies face shareholder and investor pressures to produce immediate returns, and long-term green energy projects are not seen as economically viable for many companies at this point. Upfront investments could remain unrealized for decades, and production costs alone can run up to quadruple what a company would spend on traditional energy.

Among solar, wind, and nuclear, nuclear ranks highest in price with expensive construction and overhead costs. Solar has its own cost barriers, as producing energy from photovoltaic panels costs four times as much as energy from coal and twice as much as wind power. Power generated from offshore wind is far more expensive than power produced by coal, natural gas, or even onshore wind sources. While some companies like Google are funding their own renewable energy initiatives, industry representatives understand that many of these projects need to be heavily subsidized to purchase new equipment and to encourage companies to invest in these evolving technologies.

There also are public concerns associated with renewable energy – most significantly with regard to nuclear. The recent nuclear explosion at the Fukushima Daiichi plant in Japan has exacerbated these fears, causing the American public to rethink the former push to reinvest in a US nuclear energy policy. And while nuclear projects are already under way at US plants like Comanche Peak and those owned by Exelon Corp., the industry knows that it must focus on innovative safety techniques to help mitigate risk.

Oil prices have been on a steady increase since July of 2009.

Focus on natural gas

While the US invests in developing its nuclear, wind, and solar energy output, industry experts have identified natural gas as one possible bridge between heavy reliance on foreign oil and a greener future. Additionally, shifting the focus onto shale and natural gas could alter geopolitics, reducing the power of Middle Eastern states by downgrading the demand for their oil and aid in complying with climate change regulation.

Congress also is considering the “New Alternative Transportation to Give Americans Solutions Act” (or the Boone Pickens bill as it is colloquially known), which would create tax incentives in the way of $1 billion per year for five years to encourage manufacturers to begin building heavy-duty trucks powered by natural gas instead of diesel. The US imports approximately 20 MMbbl/d of oil, 70% of which goes toward transportation fuel – and 23% of that goes to fuel the 8 million heavy-duty trucks on the roads. By taking advantage of the country’s leading natural gas reserves, this initiative has the potential to cut US OPEC imports in half.

Looming budget cuts make such tax breaks unlikely in 2011; however, this is an example of the type of action the US energy industry may be able to take in the coming years.

Natural gas shows promise as a short-term greener solution, but it is not without its own unique set of environmental concerns and extraction challenges. Hydraulic fracturing remains a controversial practice due to reports that rivers and aquifers near drilling sites have been polluted with chemical byproducts from extraction and that greenhouse gases are regularly released into the atmosphere. Even so, industry executives are committed to developing environmentally respectable harvesting techniques to tip the scales more in favor of natural gas.

The push to move away from foreign oil reliance is growing as crude oil prices remain volatile and the cost for gasoline continues to increase on a weekly basis. As a result, economists are citing a rule of thumb that for each $10 increase in the price of a barrel of oil, the GDP of the US falls 0.2 to 0.3%. And while some blame speculators for inflating fears over an oil shortfall and contend it may never happen, industry experts reinforce that supplies are continuing to decrease and a true oil crisis could come to fruition. In the meantime, expect the US to begin seriously investing in a sustainable energy future by focusing on alternative energy and relying upon natural gas as an intermediary solution.