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What Would U.S. Energy Independence Mean for USD Exchange Rates and Import-Export Businesses?

By Frances Coppola

The U.S. government's stated plan for the country to become globally dominant in energy production includes a strategic aim for the U.S. to achieve "energy independence." This is usually taken to mean that the country meets all its energy needs from its own production, instead of relying on foreign imports. It is sometimes called "energy self-sufficiency."1 But the U.S. is not just any country: because of the size of the U.S. economy and the dollar's dominance as an international reserve currency, U.S. energy independence could have profound effects on international import-export business and the dollar exchange rate.

It's important to note that energy "independence" is not quite the same as "energy dominance." Energy dominance means controlling global energy business's import-export markets by becoming the world's biggest exporter of energy sources. It is possible for a country to be self-sufficient in energy without having a dominant position in world energy markets: Iceland, for example, produces all its own energy but currently exports very little.2

 

U.S. Reliance on Oil Imports is Declining

 

The U.S. has not been self-sufficient in energy since World War II. Despite numerous policy initiatives intended to bring about self-sufficiency, ranging from the 1975 oil export ban3 to President Reagan's deregulation of the oil industry,4 the U.S. became increasingly dependent on energy imports as American oil production declined and energy use increased.5 By 2005, U.S. oil production had fallen to 2.5 million barrels per day, and imports of oil and refined petroleum products had reached a record 12.5 million barrels per day.6

 

However, the shale oil revolution reversed this trend. Natural gas production started to rise in 2006, followed by oil in 2009. Meanwhile, U.S. oil consumption fell due to high oil prices.7 As a result, the U.S.'s reliance on imported oil started to decline. Now, the U.S. meets 86 percent of its energy needs from domestic sources.8

 

The U.S.'s dependence on oil has also declined somewhat since 2005 due to diversification of energy sources, according to a Congressional report.9 In 2016, oil made up only 37 percent of the U.S.'s energy sources, the report notes. Of the remaining 61 percent, nearly half was natural gas. A further 15 percent was coal. Nuclear power accounted for 9 percent, and the remainder were renewable energy sources, of which the most significant are currently hydroelectric, wind, and biomass.10

 

Nonetheless, the U.S. still relies on foreign imports, mainly of oil, to meet 14 percent of its energy needs.11 Achieving complete energy independence would mean closing this gap.

 

How Close is the U.S. to Energy Independence?

 

The U.S. could achieve complete energy independence in several ways:

 

  • Increasing oil production;
  • Increasing production of other hydrocarbons such as natural gas and coal;
  • Developing more nuclear energy capacity;
  • Further developing renewable energy sources, such as solar, which is currently only 0.006 percent of total U.S. energy production;
  • Reducing energy use, for example by improving energy efficiency of homes and offices, switching to energy efficient home appliances and electric cars; or
  • Expanding U.S. refining capacity to produce a wider range of refined products, thus reducing the need to import certain grades of petroleum products.

Currently, all attention is focused on the first of these. The U.S.'s oil output is rising fast due to the growth of the shale oil industry. And now that the U.S. government has lifted the 1975 oil export ban, the U.S. is exporting oil. If the U.S. were to reach a point where its oil exports matched or exceeded its oil imports, it could then be said to be entirely self-sufficient in energy. This could come surprisingly soon. The U.S. Energy Information Administration (EIA) predicts that the U.S. could become a net energy exporter by 2022.12

 

However, some analysts doubt that it will be possible to eliminate oil imports completely. Because the U.S. refining industry lacks the capacity to process the light crude extracted from shale, the U.S. imports heavier crudes for its own refineries and exports shale oil for refining elsewhere.13 This creates an import-export business cycle that could be very slow to change. The EIA forecasts that the U.S. will still be importing about 6 percent of its oil in 2050, despite being a net energy exporter by then.14

 

Energy Independence, the Dollar Exchange Rate, and Import-Export Business

 

The U.S. achieving self-sufficiency in energy could have a dramatic effect on import-export businesses in global markets, and on the U.S. dollar exchange rate. If the U.S. were to cease oil imports, that could end the "petrodollar recycling" that has preserved the U.S.'s "exorbitant privilege." This could mean a lower trade-weighted exchange rate for the dollar in future, and higher U.S. interest rates.

 

For import-export businesses, a lower dollar exchange rate could be good news, provided that the dollar remains dominant in international trade. When most import-export trade is invoiced in dollars, a weaker dollar can make it easier for businesses to obtain trade finance. However, higher U.S. interest rates in future could mean higher costs for import-export businesses financing themselves in dollars.

 

For U.S. domestic businesses, energy independence could mean cheaper energy, since U.S. energy prices would no longer include international shipping costs. However, the lower dollar exchange rate could mean imported raw materials and intermediate goods becoming more expensive if these are not invoiced in dollars.

 

The

Takeaway:

The U.S. achieving energy independence could mean cheaper energy for U.S. businesses and a boost to import-export business through a lower dollar exchange rate. However, if the end of petrodollar recycling resulted in a global shift away from the dollar as principal currency for trade, businesses could find production costs increase due to higher interest rates and rising import costs.

Frances Coppola - The Author

The Author

Frances Coppola

With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.

Sources

1. “BP Economists: U.S. will be Self Sufficient in Energy by 2023,” Energy in Depth; https://www.energyindepth.org/bp-economists-us-will-be-energy-self-sufficient-by-2023/
2. “Renewable Energy in Iceland,” REUK; http://www.reuk.co.uk/wordpress/geothermal/renewable-energy-in-iceland/
3. “America’s oil export ban, explained,” The Week; http://theweek.com/articles/595142/americas-oil-export-ban-explained
4. “Reagan and Big Oil,” New Republic; https://newrepublic.com/article/98083/reagan-and-big-oil
5. “The Washington & Jefferson College Energy Index,” Webcite;https://www.webcitation.org/6CyCx3Dls
6. “Is U.S. Energy Independence In Sight?,” Forbes; https://www.forbes.com/sites/rrapier/2017/11/14/is-u-s-energy-independence-in-sight/#4355b0471a67
7. “U.S. Dependence on Foreign Oil Hits A 30-Year Low,” Forbes; https://www.forbes.com/sites/mikepatton/2016/04/20/u-s-dependence-on-foreign-oil-hits-30-year-low/#59a5475bff33
8. “U.S. Energy Facts Explained,” U.S. Energy Information Administration; https://www.eia.gov/energyexplained/?page=us_energy_home
9. U.S. Energy: Overview and Key Statistics, Congressional Research Service; https://fas.org/sgp/crs/misc/R40187.pdf
10. Ibid.
11. Ibid.
12. Annual Energy Outlook 2018, U.S. Energy Information Administration; https://www.eia.gov/pressroom/presentations/Capuano_02052018.pdf
13. “The Truth About U.S. Energy Dominance,” OilPrice.com; https://oilprice.com/Energy/Energy-General/The-Truth-About-US-Energy-Dominance.html
14. Annual Energy Outlook 2018, U.S. Energy Information Administration; https://www.eia.gov/pressroom/presentations/Capuano_02052018.pdf

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