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Houston Harbaugh Blog

Energy Independence? Current Events May Prove Test Case

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"Energy Independence" has been frequently heard in recent years as a tag-line to marshal public support for shale drilling. But, is there a connection between shale drilling and American energy independence? Recent developments may start to provide more of an answer.

For decades, oil and gas production levels and pricing have been determined by geopolitical forces and competing interests of individual countries, cartels and some of the largest companies on earth. As the Middle East has been the center of oil production for many years, much attention has been focused on this region, with fears that domestic discord or armed conflict could cause oil prices to skyrocket based on concerns that oil supply would be impacted.

Last week, Iranian General Qassem Soleimani was killed in a drone strike in Iraq, an event which has inflamed an already tenuous situation between the United States, Iran and Iraq. This event may offer some insight into the question of whether American "Energy Independence" exists - or the degree to which it exists.

On January 2, 2020, benchmark Brent Crude closed at $66.25 per barrel. On January 6, 2020, it closed at $68.91, gaining about 4% versus January 2. Since then, it has fallen. On January 2, 2020, benchmark West Texas Intermediate closed at $61.18 per barrel. On January 6, 2020, it closed at $63.27 per barrel, gaining about 3.4% versus January 2. Since then, it has fallen. For natural gas, on January 2, 2020, Henry Hub closed at $2.12 per MMBTU. On January 7, 2020, it closed at $2.16 per MMBTU, up about 1.9% - still below its December 31, 2019 close of approximately $2.19 per MMBTU.

In this small subset of time, immediately following a military action in the Middle East it appears that American benchmark oil (West Texas Intermediate) experienced less of a price increase than the European Brent Crude, though not by a substantial amount. For natural gas, however, the Henry Hub price has slightly increased in this period and is still trading at its lowest levels in months - and at a lower price than before this military action in the Middle East.

The world we live in is complex, fast moving and interconnected. Does this limited subset of data tell us anything about the concept of American "Energy Independence"? It is very difficult to project these values going forward and there remains a substantial "unknown" about whether tensions will further escalate in the Middle East. But, it does seem notable that Henry Hub natural gas pricing has not experienced any "spike" and remains at lower levels than before the recent boiling point.

Only time will tell if dramatically increased oil and gas production in the United States insulates domestic energy pricing from "flashpoint" events abroad, but it is an issue that is worth following to determine if "Energy Independence" is a real thing or whether it is simply a marketing mantra.

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