Today: Dominance Denied: How America's pursuit of energy domination destroyed the oil industry.

• Author: Verleger, Philip K., Jr.

President Richard Nixon called on the United States to pursue energy independence in October 1973. Nixon's goal was achieved in November 2019, when the United States became, for a short time, a net exporter of oil. Two years earlier, the United States had become a net exporter of natural gas. Members of the Trump administration, inspired by forecasts of further increases in U.S. oil and natural gas production, announced that the United States would dominate the energy world. "Energy Dominance" became a theme of the White House.

The U.S. success, though, was short-lived. By the summer of 2020, the United States was once again a net importer of oil. It is likely to remain so for the foreseeable future.

The U.S. effort to dominate world energy markets was blocked by oil-exporting countries, which could produce oil for one-quarter to one-tenth of the United States' production cost. These countries used their cost advantage and size to frustrate the access of the far smaller, high-cost, and highly leveraged U.S. oil producers.

The oil price decline engineered in the spring of 2020 by nations with more abundant oil and gas reserves and substantial competitive advantages in costs will likely have detrimental long-term impacts for all OECD energy producers, not just the high-cost advocates of U.S. energy dominance. The long-run futures of multinational oil companies such as BP, Chevron, ExxonMobil, and others have likely been forever damaged by the hubris and greed of the independent oil companies that rushed pell-mell to boost U.S. production.

ENERGY INDEPENDENCE PREDICTED IN 2012

Eight years ago, I wrote an article for TIE titled, "The Amazing Tale of U.S. Energy Independence" (Spring 2012). TIE included an excellent sketch of Uncle Sam on steroids, bulked up by years at the gym. The piece began this way:

In little more than a decade, the United States will find itself as an energy exporter, and this amazing outcome will have happened by accident. The United States will then have low-cost energy supplies for decades. I predicted independence would be achieved by 2023. My timing was off. The U.S. Department of Energy reported in February 2020 that the United States became a net petroleum exporter in November 2019. We had already become a net exporter of natural gas in 2018.

The breakthrough in oil and gas marked the achievement of the goal set by President Nixon following the November 1973 oil embargo. Nixon's objective was attained almost forty-six years to the date after his call for action.

However, as I wrote in 2012, accomplishment of the goal did not occur as his advisers predicted. The Nixon program was a high-cost, high-polluting plan involving massive expenditures on nuclear power and increased coal consumption. As envisioned in 1973, the success of Project Independence would have caused even higher emissions of harmful global warming gases. Of course, climate change was not a concern in 1973. Energy security was the issue of the day.

U.S. energy independence was reached instead via a low-cost path. This turn of events came about by luck, not planning, as the following developments transpired.

* The United States reaped the benefits of abundant, cheap supplies of clean natural gas.

* Firms developing these resources took advantage of new financial instruments, created by Wall Street, that let them continue expanding even when prices collapsed. The new firms were also able to enter a business previously dominated by the oligopolistic energy behemoths.

* The United States benefited as well from dramatic increases in auto fuel economy, a change that came after the 2008 gasoline price surge and GM and Chrysler's subsequent bankruptcies.

* In addition, the United States was profiting from technological advances that made lower-cost shale oil production possible.

The key to achieving energy independence was fracking. This new technology delivered what might be called "the energy independence surprise."

FRACKING: THE DRIVING FORCE FOR INDEPENDENCE

Historically, the exploration and development of oil reserves have been capital-intensive processes. Costs are extraordinarily high, often in the billions. Worse, over time, almost every project seemed to get larger and more expensive, while the returns often appeared smaller.

Survival was seen to require bigger and bigger companies, according to the collective wisdom of industry officials and academics. Thus, a rush of mergers between large firms occurred in the last years of the 1990s. The wave began when BP acquired Amoco and then Arco. BP's actions were followed by several other mergers, culminating in the joining of Exxon and Mobil.

In 1998, Robert Corzine wrote the following:

In the world of the seven sisters it is marry or die. The merger talks between Exxon (market capitalization $175bn) and Mobil (market cap $60bn) suggest that nowadays $100bn is the minimum size for an oil major. Corzine explained that the need for size was tied to the high cost of building refineries, the need to spread risk over expensive projects, and the falling...