Policy and Practice in North American Energy Security
Abstract
The goal of achieving energy security provides a unique opportunity for cooperation between the United States, Canada, and Mexico. The United States and Canada have shaped their energy policies in response to the oil supply shocks of the 1970s and 1980s, while Mexico is currently experiencing a reduction in its own domestic oil supply. Energy security is often associated with energy independence and self-sufficiency for supply. This strategy remains impractical for the three North American countries because they are already interconnected in energy supply and demand. Due to the geographic distribution of raw fuels and need for exploration of unconventional resources, North American energy security will be better served by a policy of energy interdependence. The relationships forged through the North American Free Trade Agreement, the Security and Prosperity Partnership, and the North American Electrical Reliability Corporation have set a policy precedent for trilateral cooperation. Energy security is a crosscutting issue because it encompasses trade, labor flows, infrastructure, and defense. This study reviews the regulatory frameworks of the oil, natural gas, and electrical markets in the three North American countries to assess the energy security environment on the continent. It then proposes possible avenues for integrating the continental energy market, which could serve the greater purpose of increasing the sense of collective identity for North America.
The United States, Canada, and Mexico each has a unique history in the development of their national energy policies, however, all three countries continue to struggle with growing domestic demands for energy. Developing renewable energy resources and improving technologies for extracting unconventional resources will promote energy security by increasing supply.1 However, instead of realizing these gains independently, energy security for the United States, Canada, and Mexico should be incorporated into the existing trade and security relationships between the three countries. This holistic perspective would promote North American energy security by improving efficiency of production and distribution and will be best achieved by a strategy of energy interdependence.
Threats to energy security can take the form of natural disasters, cyber attacks, or regional disputes involving exporting countries. Each of these situations has the potential to disrupt supply flows and impair the functioning of critical infrastructure. Hurricane Katrina served as an integrated shock because it simultaneously interrupted flows of oil, natural gas, and electricity throughout North America.2 Canada and Mexico assisted the US Federal Emergency Management Agency with disaster response. This event demonstrates that cooperative continental defense strategies can help to ensure energy security.
The idea of energy interdependence is particularly relevant to North America because the United States, Canada, and Mexico import and export energy from one another. Rather than operating the North American energy markets individually for each country, the United States, Canada, and Mexico should develop regional markets that can overlap easily across the international borders.3 For example, Canada is currently the largest supplier of energy to the United States.4 In 2010, 25.1 percent of net US oil imports came from Canada and 8.5 percent came from Mexico.5 The United States provides 65.9 percent of Mexico’s net natural gas imports.6 Although the three countries cannot completely satisfy their energy needs in a North American triad, the relationship of energy sharing could act as a stabilizing force for the continent in the face of tenuous import-export relationships in the international energy trade.
I do not suggest a reversion to absolute energy independence because historical trends in North American consumption and continued reliance on foreign markets demonstrate that this is neither feasible nor practical. The United States alone consumes 19 percent of the world’s primary energy, which makes energy independence an unrealistic goal for North America.7 After Canada, Saudi Arabia is the second largest source of US petroleum imports.8 According to the projections of the United States Energy Information Administration (EIA), the United States will remain a key actor in the international energy trade well beyond 2035.9 As shown by the controversy over expanding drilling into the Arctic National Wildlife Refuge and further into the Gulf of Mexico, environmental concerns have also constrained US plans for energy independence. Furthermore, a policy of energy self-sufficiency for the continent could be seen as isolationist, which would be unfavorable for global perceptions of the three countries, particularly the United States. Given the geographic distribution of raw fuels and need for exploration of unconventional resources, North American energy security will be better served by a policy of energy interdependence.
The purpose of this paper is to assess the possibilities for improved energy security between the United States, Canada, and Mexico to provide the three countries with opportunities and incentives to reduce their dependence on foreign energy imports. This strategy will increase interdependence in the North American energy markets to enhance continental energy security. While each energy sector is unique, the individual national policies of the United States, Canada, and Mexico directly affect opportunities for growth and development.
I will first outline the current energy security environment in North America by discussing country-specific energy strategies that bear upon US policy and evaluate opportunities for integration from both supply and demand perspectives. I will then consider a literal definition of energy security in which measures of forcible protection can be used to minimize the risk of physical threat to critical infrastructure and key resources in North America. Through this investigation of trends in US consumption and import-export relations in North America, I will demonstrate that there are unique opportunities for energy cooperation among the United States, Canada, and Mexico that will be economically advantageous and helpful in legitimizing the North American Free Trade Agreement (NAFTA) and the Security and Prosperity Partnership (SPP).
DEFINING ENERGY SECURITY
It is first necessary to define the concept of energy security. When Winston Churchill advocated a shift in the fuel source of the British Navy from coal to oil in 1911, he declared, “Safety and certainty in oil lies in variety and variety alone.”10 This statement has become a maxim for energy security because it illustrates the importance of diversification of supply. For many net-importing countries including the United States and Mexico, this is still an accurate definition of energy security as it indicates the pursuit of a stable base of resources at affordable prices.11 Diversity of supply provides multiple fuel sources to mitigate the incidence and duration of disruptions from one particular source due to political unrest or failed infrastructure. For net-exporting countries such as Canada, energy security refers to stability of demand for their exports.12
PRESENT AND FUTURE PROSPECTS FOR NORTH AMERICAN ENERGY
Before considering a strategy of energy independence, it is worthwhile to examine the present and future prospects of North American energy production and consumption. While the United States, Canada, and Mexico each maintain some export capacity, North America is still a large source of energy demand in the world market. The continent consumes about 29 percent of the world’s annual energy supply but represents only 6.9 percent of the global population.13 This asymmetry of demand necessitates continued growth in supply over time.
The five most commonly used primary fuels in North America are oil, coal, natural gas, nuclear power, and water.14 In 2010, 37.2 percent of US energy consumption came from oil, as did 32.3 percent of Canadian consumption, and 51.6 percent of Mexican energy consumption.15 The tendency of oil to dominate demand warrants special consideration because it makes the North American energy market particularly susceptible to international oil price fluctuations. Furthermore, international demand for oil is steadily increasing due to economic growth in developing countries such as China and India,16 which may lead to demand competition in the near to long term that would cause fuel commodity price increases.
Each North American country has something to contribute to a continental energy supply. Canada is the only net exporter of energy commodities on the continent.17 These products include petroleum, natural gas, coal, and hydroelectricity.18 In 2010 Canada was also the largest source of US oil imports.19 Mexico is a net energy exporter in the sectors of petroleum and electricity; however it is a net importer of natural gas resources.20 The United States imports petroleum from Canada, but exports natural gas to Mexico.21 These flows illustrate the existing complexities and interdependencies of the North American energy market.
Crude oil is the largest source of primary energy in North America, and in 2010, accounted for 37.5 percent of continental energy demand. 22 Therefore, it is important to consider the stability of supply. In 2010, the United States had a 52.3 percent share of continental oil production, Canada had 25.1 percent, and Mexico had 22.6 percent.23 This composition is poised to change as Canada possesses 84.2 percent of proven North American oil reserves.24 Ninety-eight percent of Canadian proven reserves are in the form of bituminous oil sands in Alberta and Athabasca.25 Oil sands are an unconventional source of oil that requires a specialized extraction process.26 Canada has increased oil sands production in the last decade due to improved technologies and high oil prices.27 There are several practical approaches to increasing the reliability of North American energy supply, which are discussed below.
MEXICO
In Mexico, the primary obstacle to achieving long-term energy security is a restrictive policy stance to research, development, and production. The current era of Mexican energy policy began in 1938 when the oil industry was nationalized to form Petróleos Mexicanos, or Pemex.28 This move was supported by Article 27 of the Mexican constitution, which states that only the government has legal authority to exploit, distribute, and process hydrocarbons in solid, gas, and liquid forms.29 Such a sweeping definition of the petroleum industry ensures that all energy resource activities are completely entrusted to the Mexican state.30 The Pemex conglomerate claims ownership of energy resources on behalf of the Mexican people. Pemex has also emerged as a major source of income for the state as taxes and direct payments from Pemex consistently represent about 40 percent of total government revenue.31
The outlook for future oil production in Mexico is not promising. Between 1965 and 2006, Pemex increased production 3,700 times.32 This pace is not sustainable, and Mexico will most likely experience a decrease in crude oil production from 2008 to 2030 because of diminishing output from Cantarell, the country’s most productive oil field.33 Although Cantarell is located in the shallow Bay of Campeche, most of Mexico’s major oil fields are believed to be offshore.34 Pemex has hesitated to invest in exploration and development of deepwater projects due to high start-up costs.35 Therefore it is unlikely that Mexico will be able increase production in the near-term to offset the impact of Cantarell’s decline.
The Mexican government has accepted some small measures of privatization in the 60 years since nationalizing the oil industry. These concessions were borne out of necessity to defray costs of exploration and development and have opened the door for future flexibility to adjust to market conditions in North America. The Pemex Organic Law of 1992 divided the energy conglomerate into four decentralized subsidiary divisions: (1) Pemex Exploration and Production; (2) Pemex Refining; (3) Pemex Gas and Basic Petrochemicals; and (4) Pemex Petrochemical.36 The fourth division included derivative petrochemicals such as benzene, propylene, and ammonia.37 Unlike the other three divisions, the production of specific secondary products in Pemex Petrochemical was not considered a “strategic activity” that necessitated state ownership.38 This allowed the company to accept up to 40 percent foreign investment.39 Another step towards liberalization occurred in 1993 with the Foreign Investment Law, which created a framework permitting foreign investors to provide energy contract services such as transportation, distribution, and storage of natural gas.40
Pemex also served as a focal point for negotiations of NAFTA in 1994. In Mexico it was generally believed that the United States intended to use NAFTA to better access the Mexican energy supply.41 Citing their constitution in defense of a nationalized oil industry, Mexico won several key exemptions in the area of energy trade. For example, Annex 602.3 of NAFTA allows the Mexican state to retain its right to the exploitation, refining, processing, and pipelining of crude oil, natural gas, and basic petrochemicals. The Mexican delegation also refused to guarantee oil supply to Canada and the United States and prohibited the establishment of foreign gas stations in Mexico.42
Despite Mexico’s reservations to NAFTA, the agreement codified small measures of liberalization in the Mexican energy industry. It solidified the Foreign Investment Law to open natural gas and chemical supply contracts to a public bidding system.43 Article 1110 in Chapter X of NAFTA also provides protection for foreign investors in the event that Mexico tries to expropriate, or nationalize, investments.44 This is an important departure from Mexico’s longstanding policy of expropriation under the Calvo Doctrine, whereby the government can establish “fair value” for foreign assets based on their own domestic standards rather than in the international marketplace.45
In October 2008, the Mexican Senate Energy Committee passed seven bills designed to strengthen Pemex. The committee aimed to boost sources of capital by issuing preferential bonds to Mexican citizens and including provisions for Pemex to pay foreign companies to explore and produce oil.46 However the reforms stop short of allowing Pemex to make profit- sharing agreements with foreign companies, and prohibit foreign companies from building and owning refineries.47
The Mexican electrical sector was the one area that made significant strides towards liberalization as a result of NAFTA. Although the electrical industry is nationalized under the Comisión Federal de Electricidad, electricity it is not as tightly regulated in the Mexican constitution because it is a secondary energy product. To prepare for NAFTA, the Mexican legislature amended its Law for the Public Service of Electric Power in 1992 to allow foreign companies to own and operate electric generation facilities in Mexico.48 Aiming to capitalize on continental demand, Mexican companies have also constructed power plants along the US border with the sole purpose of selling electricity to the United States.49
Mexican energy policy centers on the conglomerate of Pemex. Although small steps have been taken towards privatization and liberalization, the nationalization of the Mexican energy industry could serve as a barrier to innovation and integration into the North American energy markets.
CANADA
Canadian energy policy has evolved around the geographic distribution of its significant natural resources. Whereas Mexican hydrocarbons belong to the state, the Canadian constitution confers lands, minerals, mines, and royalties to individual provinces.50 This decentralized ownership structure has caused problems between the federal and provincial governments because Canada’s energy resources are concentrated in sparsely populated areas of the country.51 For example, the most populated provinces of Ontario and Quebec do not realize gains from resource exploitation on the same scale as Alberta and Saskatchewan, which are rich in oil sands. Claims to natural resource revenues by indigenous First Nations are currently under investigation by the United Nations Committee on the Elimination of Racial Discrimination.52 As a result of the unequal geographic distribution of resources, Canada emphasizes cooperation between the federal and provincial governments as the foundation of their energy policy.
Prime Minister Trudeau’s National Energy Program (NEP) of 1980 was instrumental in shaping the Canadian energy security strategy. Like the United States, Canada experienced oil crises in 1973 due to the OPEC embargo and in 1979 due to the Iranian revolution. Similar to concurrent US energy policy under Nixon, the Canadian National Energy Program was crafted in response to those supply shocks and aimed for Canadian energy independence by 1990.53 The program expanded the holdings of the state-owned energy company, Petro Canada, which was given special exploration privileges and price subsidies.54 The National Energy Program also restricted foreign investment in Canadian energy companies, froze natural gas exports, and slowed oil exports to the United States.55 Unsurprisingly, the program was not well received in the United States. The Canadian provinces also objected to the NEP’s resource taxation measures which were designed to increase federal revenues. A conservative government replaced Trudeau’s liberal administration in 1984, at which time the incoming Prime Minister Mulroney began to dismantle the NEP.56
As a part of the backlash to the NEP, an energy chapter was negotiated in the 1988 Canada-United States Free Trade Agreement.57 The agreement prevented Canada from charging taxes on exports unless they charged the same taxes in their domestic markets.58 It also prohibited setting minimum and maximum prices on imports and exports and guaranteed the United States its proportional share of output if Canada should choose to reduce production.59 The provisions of the agreement served as a model for later NAFTA energy negotiations; however Mexico would not accept many of the provisions.60
Since 1990, Canada and the United States have both engaged in deregulation of their oil, natural gas, and electrical industries. Canada privatized its state-owned oil company Petro Canada between 1991 and 1994.61 Today Canada’s largest oil company is majority-owned by the US company ExxonMobil. The parallel process of privatization has minimized state intervention in the energy trade so that market forces determine the resource flows between the United States and Canada.62 This has increased the level of integration and interdependence in the United States-Canada bilateral energy market, particularly in oil and gas.
The concurrent developments in Canadian and US energy policy from the oil shocks to deregulation served to enhance energy trading relationships between the two countries. Combined with Canada’s vast natural resource wealth, this similarity has allowed the United States and Canada to obtain a higher degree of integration with each other than they have with Mexico.
UNITED STATES
Every American President since Richard Nixon has prioritized energy security as a US policy goal. Even so, the United States is still a net importer of fossil fuels.63 In 2010, the net import share of total US energy consumption was 21.8 percent.64 That same year, the United States consumed 21.1 percent of the world’s oil, but only produced 8.7 percent of it.65 On June 15, 2010, President Obama discussed the link between US dependence on fossil fuels and the threat to national security in his remarks to the nation in the aftermath of the BP oil spill. Not surprisingly, the Obama Administration’s 2011 Blueprint for a Secure Energy Future proposes to develop “every available source of American energy” to reduce US dependence on foreign oil.66 This policy draws on the recommendations outlined in the 2011 US Annual Energy Outlook which suggests that the future of US energy inputs lies in production growth from unconventional resources and improved extraction technologies.67
The OPEC embargo of 1973 proved a critical juncture for the evolution of US energy policy. In response to US support for the Israeli military, OPEC countries cut off oil exports to the United States, which tripled the price of oil and quadrupled the price of gasoline.68 This created mass popular unrest and caused President Nixon to declare a policy goal of energy independence.69 Energy independence was not a new idea for the United States. Through 1950, the United States produced 50 percent of the world’s oil, which was more than enough to meet the nation’s demand.70 The post-WWII boom caused demand to exceed domestic supply.71 Since then, the concept of energy independence has resulted in an aggressive exploration of production sites, development of more efficient technologies, and investment in renewable energy sources.
The scarcity of oil imports in 1973 increased demand for other forms of energy such as natural gas. However, at the time, markets were heavily regulated and could not meet consumer needs. The National Energy Act of 1978 created the Federal Energy Regulatory Commission which gained powers of oversight to unify intra- and interstate gas markets. The Energy Act also included the Natural Gas Policy Act which tipped the natural gas market toward deregulation as it implemented a framework for removing price caps.72 This led to the “unbundling” of natural gas supply and transportation rights in 1992 with Commission Order 636.73 The Energy Policy Act of 1992 directly addressed increasing demand for coal, natural gas, oil, and electricity. This Act sought to reduce US dependence on imported oil through the use of alternative fuels.74 The US Energy and Security Independence Act of 2007 strengthened the 1992 efficiency standards and used language that directly linked energy conservation to national security.75
The United States currently outperforms Canada and Mexico in annual production of oil, yet it possesses only 11 percent of North American proven oil reserves.76 Although crude oil production in the United States actually decreased by 10 percent from 1998-2009, the 2011 US Annual Energy Outlook predicts that the US is expected to continue exporting a significant portion of the continental oil supply through 2030.77 Potential areas for increasing US production include exploration of the outer continental shelf and exploitation of oil shale in the Rocky Mountain states, which is expected to begin in the 2020s.78 President Obama’s Blueprint for a Secure Energy Future outlines additional ways to increase US production, such as greater onshore and offshore exploration in Alaska and increased leasing opportunities for oil companies in the continental United States and Gulf of Mexico.79 Technological improvements could also increase production from existing onshore sources through hydraulic fracturing, which involves injecting carbon dioxide or chemicals into a crude oil reservoir to increase the flow of oil to the surface.80
COMPARATIVE ANALYSIS
The US electrical sector shares some similarities with the energy policy histories of Canada and Mexico. As in Mexico, the US electrical industry was the first to be heavily deregulated. Like Canada, the United States has experienced regional difficulties in managing energy demand. The 1978 Public Utility Regulatory Policy Act opened the US electrical industry to competition in the area of power generation.81 According to the act, utilities were required to purchase lower cost electricity from plants built by independent providers. Indirectly, the act encouraged the development of more efficient technologies for electrical generation. However, the lengthy process of deregulation caused problems in coordination of regional and national energy policies. For example, California energy prices rose sharply as a result of deregulation in 1998.82
North American energy security for the electrical sector predates NAFTA. Electricity is important on the regional level since it cannot be stored. Therefore demand must be constantly balanced with supply. For example, British Columbia sells electricity to California in the summer and purchases it from California in the winter because Canada has more severe winter weather.83
A non-governmental organization known as the North American Electrical Reliability Council (NERC) was originally formed in 1968 to manage the overlapping electrical grids in North America. The US National Energy Policy Act of 2005 called for the creation of a self-regulating Electric Reliability Organization, for which the NERC was ideally suited. Consequently, the Council was renamed the North American Electrical Reliability Corporation in 2006. The corporation has public and private representatives from the United States, Canada, and Mexico that consider continental issues. While the United States and Canada already share an integrated electrical grid, Baja California is the only region of Mexico that operates synchronously with an adjoining network in the United States.84
While oil is part of a global market affected by many political and economic factors, natural gas has greater significance at the continental level.85 The current layout of natural gas transportation networks in North America provides a good starting point from which to explore opportunities for increased connectivity. Natural gas is important because it is used for both heating and generating electricity and is the cleanest- burning fossil fuel. The natural gas pipeline infrastructure is important because it flows in all directions from each of the three North American countries. Although Canadian natural gas is mostly produced in the western provinces, it is marketed in central Canada and the United States. Eighty-eight percent of US natural gas imports come from Canada.86 Between 1990 and 2008, the capacity to import natural gas via the pipeline from Canada to the United States increased by 181 percent and export capacity from the United States to Canada increased by 300 percent.87 Conversely, the United States is a net exporter of natural gas to Mexico.88 From 1990 to 2008, US pipeline import capacity from Mexico increased 147 percent and export capacity grew by 400 percent.89
TRILATERAL COOPERATION
Implementing national legislation to limit energy consumption can function to increase energy security, however cooperation in the area of production and supply is the most effective way to pursue energy security for North America. Each of the three countries has areas of specialization that can be maximized through a strategy of energy interdependence to provide reliability in energy supply. Due to geographic resource distribution, these developments have often been limited to dual-bilateral agreements between the United States and Canada and the United States and Mexico.
One example of trilateral North American energy cooperation is the Security and Prosperity Partnership (SPP) of 2006. Although the future of the partnership has been called into question because it was not renewed in 2009, the SPP represented the most organized and comprehensive agreement since NAFTA.90 It closed a gap in NAFTA where regulatory frameworks were not centralized for energy trade. The SPP accomplished this by formally integrating the North American Energy Working Group into the partnership with the purpose of enhancing communication, infrastructure, and energy trade between the United States, Canada, and Mexico.91 One purpose of the Working Group was to establish a stable continental energy policy to attract international investment in the North American energy markets.92 This contributed to a greater goal of the partnership, which was to increase development and economic growth in North America.
THREATS TO ENERGY SECURITY
Security and Infrastructure
The expansion of pipelines and transmission networks facilitates energy distribution throughout North America, but it also increases vulnerability to physical attack. Energy security can be interpreted literally to include forcible protection used to minimize the risk of physical threat to critical infrastructure and key resources in North America. The United States has formally recognized the linkages between energy, critical infrastructure, and national security. In the aftermath of the terrorist attacks on 9/11, key energy assets such as refineries, gas-processing plants, offshore rigs, pipelines, and power grids were recognized as potential targets for terrorists.93 President George W. Bush defined and prioritized the concept of critical infrastructure in the USA PATRIOT Act of 2001 to include “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety.”94 The 2002 National Strategy for Homeland Security specifically identifies energy as a critical infrastructure sector,95 making energy security a matter of national defense.
As the North American energy networks continue to integrate, they will become more vulnerable to attacks on critical infrastructure. One example of failed infrastructure is the August 2003 electrical blackout. The disturbance centered in Ohio, which is a high-density area of power transmission lines.96 Due to the integrated electrical grids between the United States and Canada, the disruption affected eight US states in the Midwest, and Northeast, as well as parts of Ontario. While it was not considered a terrorist attack, the incident shows that increased connectivity also increases vulnerabilities. Just as the electrical grid has areas of high- density, the major hubs of US oil pipeline and refinery infrastructure are located near major reserve areas in California, Texas, and Louisiana.97
The increased connectivity of the North American electrical grid necessitates continental defense strategies to protect critical infrastructure. One example of an attempt to minimize threats to such critical infrastructure is the Smart Border Declaration signed by Canada and the United States in December 2001. This document includes measures to encourage information sharing and prioritizes the security of energy infrastructure from terrorist threats. Integrated energy networks are more vulnerable to cyber attacks because terrorists or enemies can use them as opportunities to exploit pieces of hardware with far-reaching connectivity. Consequently, the three North American countries must weigh the ease of use gained by merging their networks with increased risks of physical and virtual attacks.
Environment
Environmental concerns will be a major issue in the future of North American energy security. Canada currently has a more sustainable energy resource base because of the country’s reliance on renewable hydropower. For example, in 2009 Canada generated 63.2 percent of its electricity from hydropower, which is a renewable resource.98 In that same year the United States obtained 44 percent of its electricity from coal.99 Canada also ratified the Kyoto Protocol of the UN Framework Convention on Climate Change in 2002, which requires signatories to establish target levels for reducing Greenhouse Gas emissions. The United States did not sign the Kyoto Protocol, claiming that it did not impose strong enough restrictions on rapidly developing countries such as China and India. The first commitment period of the Kyoto Protocol ends in 2012, and Canada plans to withdraw from the Protocol after greatly exceeding its emissions quotas.100 This will move Canadian environmental policy closer in line with that of the United States and may signal a Canadian desire to use more aggressive means to exploit unconventional energy resources.
The future involvement of the US Environmental Protection Agency (EPA) in environmental regulations for energy production will play an important role in American energy strategy. This is because the United States has a system of aging coal-fired power plants that are coming due for retrofits or retirement.101 Since the Clean Air Act was reformed in 1990, these plants have been subject to EPA National Ambient Air Quality Emissions Standards, which include limitations on nitrogen oxides, sulfur oxides, ozone, and particle emissions. In 2010, the EPA proposed the Air Transport Rule to address a failing of the Clean Air Act. States on the East Coast were being polluted by emissions from coal-fired power plants in upwind states like Missouri, Iowa, Indiana, and Michigan. The Air Transport Rule expands on the Clean Air Act requirements to impose more stringent regulations on nitrogen oxides and sulfur oxides originating from power plants.102 The US Annual Energy Outlook of 2011 predicts that the EPA will continue to enact more legislation to reduce emissions and pollution through 2020.103
The decision of whether to retrofit older power plants or to retire them will be influenced by the price of natural gas. As the marginal fuel for electricity generation (coal being the primary fuel), low natural gas prices mean that coal plants are more likely to be retired than retrofitted.104 Similarly, increasing demand can be better met by building natural gas power plants to raise capacity because they have lower capital costs than building coal and nuclear plants.105 The 2011 Annual Energy Outlook projects that the supply of natural gas will increase through 2035 with improved extraction technologies for shale gas in Texas and the Mountain West.106 As the largest supplier of natural gas to the United States, Canada will also be in a position to increase exports. This scenario underscores the near-term importance of enhancing the pipeline distribution system between the United States and Canada.
Future Energy Interdependence
The United States-Canada energy market has taken on a ‘borderless’ identity. From the unpopularity of the 1980 NEP, Canada learned that US consumers would not tolerate protectionism of Canadian energy industries. This demand-based perspective highlights the closeness of the United States and Canada and the fact that both countries import and export natural gas and electricity from one another. This relationship is a good foundation for strengthening other aspects of the United States- Canada defense relationship. The United States-Mexico energy market is less active, but flows of petroleum between the two countries are bidirectional. The higher US refining capacity plays a large part in this relationship; however reducing bureaucracy could strengthen the linkage. Perhaps the key to stimulating integration of the North American energy markets is to first conceptualize a “continental” demand and to then address the issue of production on a larger scale.
Of the three North American countries, Mexico stands to gain the most from continental energy interdependence. To address near-term declines in production, Mexico needs to hasten its trend of opening its energy industry. Mexican energy policy is currently the most restrictive in North America because the state limits exploration and foreign investment. Technological innovation in exploration and deep-water extraction techniques are necessary to increase Mexican oil production. These improvements should be prioritized in pursuit of North American energy interdependence because Mexico has the potential to meet some of the US demand for petroleum.
Mexico also has the ability to meet some of the US demand for electricity. The policy precedent of opening the Mexican electrical market may serve to increase integration of the United States-Mexico electrical grid. If this is successful, Mexico may begin to see financial gains from foreign investment and begin long-term plans to develop other energy resources with US and Canadian companies. The most important factor in attracting foreign investment will be to allay fears of expropriation by demonstrating stability in energy regulations and taxation regimes. Another way to increase exploration would be to consider profit-sharing agreements based on production capacity of new fields.
The Transboundary Hydrocarbons Agreement signed between the United States and Mexico in February 2012 signals greater bilateral cooperation between the two countries in developing oil and gas reservoirs in the Gulf of Mexico and a shared desire to increase production.107 The agreement contains provisions to facilitate joint projects between US companies and Pemex, and will also bring the less stringent Mexican environmental regulations closer in line with those of the United States as both countries strive to exercise responsible stewardship of resources across the international maritime boundary.108
There are a few other issues for North American energy security that would benefit from future research. For example, this study did not consider the market for hydropower because it is not a significant source of production for the United States or Mexico. As a zero-emission renewable resource, water power will become more important as production in conventional and unconventional natural resources starts to slow. President Obama’s 2011 Blueprint for A Secure Energy Future prioritized domestic development of other renewable energy resources such as biofuels. In August 2011, Obama allocated $510 billion for cooperative projects in biofuels research among the Department of Agriculture, the Department of the Navy, the Department of Energy, and the private sector.109
A second area for consideration is nuclear energy. I did not discuss nuclear energy because it currently represents less than 10 percent of production in each of the three North American countries.110 Although nuclear plants are among the most expensive to build, they do not emit greenhouse gases.111 Canadian uranium deposits could also provide much of the North American fuel supply.112 One potential barrier to building and sharing nuclear capacity is that it would likely require binding trilateral agreements because dual-use technology traditionally falls under strict national control. If safeguards can be implemented against contamination and reactor malfunctions, nuclear energy might be able to compete with natural gas in the long term.
While energy interdependence is a realistic goal for North America, importing liquefied natural gas (LNG) has been portrayed as the solution that will bridge the gap between gas production and consumption on the continent.113 LNG is natural gas that has been cooled. It has 1/600 the volume of tradition natural gas, is non-combustible, and non-toxic. These properties make LNG easy to transport by container ship.114 While increased investment in LNG imports may hedge against oil price shocks, Alaska is the only US LNG terminal currently capable of generating export capacity. Consequently, North American reliance on LNG will come at the expense of developing continental solutions to supply shortages and could perhaps reduce interdependence.
CONCLUSION
The United States and Canada have shaped their energy policies in response to the oil supply shocks of the 1970s and 1980s while Mexico is currently experiencing a reduction in its own domestic oil supply. As Mexico implements measures of privatization to increase foreign investment, the relationships forged through NAFTA, the SPP, and the North American Electrical Reliability Corporation will serve as a policy precedent for trilateral cooperation. The Transboundary Hydrocarbon Agreement of 2012 will increase opportunities for US investment in the Mexican energy industry and will ultimately contribute to economic prosperity for North America.
Energy security is crosscutting because it encompasses trade, labor flows, infrastructure, and defense. The increased connectivity of the North American electrical grid necessitates continental defense strategies to protect critical infrastructure. Progress in the arena of North American energy interdependence will not only ensure security of supply, but it will enhance the breadth of working relationships for the United States, Canada, and Mexico. In this way, addressing the issue of energy security could contribute to furthering the collective identity of North America in a way that traditional trade and political relationships do not.
1 US EIA, “Annual Energy Outlook 2011,” 33.
2 Daniel Yergin, “Ensuring Energy Security,” Foreign Affairs 85 (2006): 2.
3 Joseph M. Dukert, “North American Energy–2006,” Center for Strategic and International Studies 3 (2006): 2.
4 US EIA, “Country Analysis Brief, Canada,” Last Updated April, 2011. http://205.254.135.7/countries/cab.cfm?fips=CA
5 BP Statistical Review of World Energy, June 2011, 19.
6 BP Statistical Review of World Energy, June 2011Ibid., 28.
7 BP Statistical Review of World Energy, June 2011, 40.
8 US EIA, “Half of US liquid fuels net imports in 2010 came from the Americas,” April 15, 2011. http://www.eia.gov/todayinenergy/detail.cfm?id=970
9 US EIA. “Annual Energy Outlook 2011” (2011): 285.
10 Yergin, “Ensuring Energy Security,” 1.
11 Ibid., 2.
12 Ibid.
13 North American Energy Working Group, “Energy Picture II,” 10.
14 Ralph Klein, Brian Tobin, and Gerry Angevine, “A Vision for a Continental Energy Strategy,” Fraser Institute (2008): 21.
15 BP, “Statistical Review of World Energy,” June 2011: 41.
16 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 15.
17 US EIA, “Canada Country Analysis Brief,” last updated April 2011, http://www.eia.doe.gov/countries/cab.cfm?fips=CA
18 Ibid.
19 Ibid.
20 US EIA, “Mexico Country Analysis Brief,” last updated June 2010, http://www.eia.doe.gov/countries/cab.cfm?fips=MX
21 North American Energy Working Group, “Energy Picture II,” 28.
22 BP Statistical Review of World Energy, June 2011, 11.
23 Ibid., 10.
24 BP Statistical Review of World Energy, June 2011Ibid., 6.
25 Angevine, “Towards North American Energy Security,” 13.
26 Ibid., 16.
27 Ibid.
28 Alicia Puyana, “Mexican Oil Policy and Energy Security Within NAFTA,” Intl Journal of Political Economy 35 (2006): 74.
29 Ibid., 76.
30 Rogelio Lopez-Vallarde, “Mexico’s New Petroleum Law: The Internal Reforms at Pemex and the North American Free Trade Agreement,” Intl Lawyer 28 (1994): 2.
31 Standard and Poor’s RatingsDirect Summary, “Petroleos Mexicanos, (PEMEX) (2008): 2. http://www.ri.pemex.com/files/content/PEMEX_SA_0508_ING1.pdf
32 Puyana, “Mexican Oil Policy and Energy Security Within NAFTA,” 76.
33 Angevine, “Towards North American Energy Security,” 25.
34 Ibid., 20.
35 Ibid., 25.
36 Martin Miranda, “The Legal Obstacles to Foreign Direct Investment in Mexico’s Oil Sector,” Fordham Intl Law Journal 33 (2009): 216.
37 Lopez-Vallarde, “Mexico’s New Petroleum Law,” 15.
38 Ibid.
39 Ibid.
40 Miranda, “Legal Obstacles to FDI in Mexico’s Oil Sector,” 216.
41 Puyana, “Mexican Oil Policy and Energy Security Within NAFTA,” 86.
42 Ibid., 87.
43 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 5.
44 Miranda, “Legal Obstacles to FDI in Mexico’s Oil Sector,” 233.
45 Ibid., 234.
46 Ibid., 217.
47 Ibid.
48 Joseph A. McKinney, “Integration of North American Energy Markets,” 14.
49 McKinney, “Integration of North American Energy Markets,” 14.
50 Monica Gattinger, “From Government to Governance in the Energy Sector: The States of the Canada-US Energy Relationship,” American Review of Canadian Studies (2005): 325.
51 Gattinger, “From Government to Governance in the Energy Sector,” 324.
52 “First Nations leader wants more resource revenue,” CTV News, March 18, 2012. http://www.ctv.ca/CTVNews/Canada/20120318/first-nations-resource-plea-120318/
53 Gattinger, “From Government to Governance in the Energy Sector,” 326.
54 McKinney, “Integration of North American Energy Markets.” Energy in Europe and North America: From National to Human Security Conference. Trento, Italy April 18-19, (2008): 2.
55 Gattinger, “From Government to Governance in the Energy Sector,” 326.
56 Gattinger, “From Government to Governance in the Energy Sector,” 326.
57 Ibid.
58 Puyana, “Mexican Oil Policy and Energy Security Within NAFTA,” 87.
59 Ibid.
60 Ibid.
61 McKinney, “Integration of North American Energy Markets,” 4.
62 Gattinger, “From Government to Governance in the Energy Sector,” 331.
63 US Energy Information Administration, “Annual Energy Outlook 2012,” (2012): 8.
64 Ibid.
65 BP, “Statistical Review of World Energy,” June 2011, 9.
66 “Remarks by the President on Energy,” University of Miami, February 23, 2012. http://www.whitehouse.gov/the-press-office/2011/03/30/remarks-president-americas-energy-security
67 US EIA, “Annual Energy Outlook 2011,” 33.
68 Ibid., 2.
69 Yergin, “Ensuring Energy Security,” 2.
70 Ron Bengtson, “American Energy Independence,” AmericanEnergyIndependence.com (2010): 2.
71 Ibid.
72 US Department of Energy, “A Primer on Electric Utilities, Deregulation, and Restructuring of US Electricity Markets,” (2002): 30.
73 Ibid., 57.
74 Yusuke Onoda, “Energy Deregulation in the United States and Japan,” Harvard Univ. Program on US-Japan Relations Working Paper (2007): 8.
75 Congressional Research Service Report for Congress, “Energy Independence and Security Act of 2007: A Summary of Major Provisions (2007): 8.
76 BP Statistical Review of World Energy, June 2011, 6.
77 Angevine, “Towards North American Energy Security,” 20.
78 Ibid.
79 The White House, “Blueprint for a Secure Energy Future,” March 30, 2011, 11. http://www.whitehouse.gov/sites/default/files/blueprint_secure_energy_future.pdf
80 Angevine, “Towards North American Energy Security,” 20.
81 Onoda, “Energy Deregulation in the United States and Japan,” 13.
82 Ibid., 27.
83 McKinney, “Integration of North American Energy Markets,” 13.
84 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 14.
85 Gattinger, “From Government to Governance in the Energy Sector,” 334.
86 US EIA, “US Natural Gas Imports & Exports: 2010,” October 20, 2011, http://www.eia.gov/naturalgas/importsexport/annual/index.cfm
87 US EIA, “About Natural Gas Pipelines,” last updated 2008
http://www.eia.gov/pub/oil_gas/natural_gas/analysis_publications/ngpipeline/impex.html
88 Dobson, “Shaping the Future of the North American Economic Space,” (2002): 15.
89 US EIA, “About Natural Gas Pipelines,” last updated 2008.
90 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 6.
91 North American Energy Working Group, “Energy Picture II,” 7.
92 Ibid., 4.
93 Martin Rudner, “Protecting North America’s Energy Infrastructure Against Terrorism,” Intl Journal of Intelligence and Counterintelligence 19 (2006): 432.
94 USA PATRIOT Act, (2001) P.L. 107-56, (Sec. 1016(e))).
95 US Office of Homeland Security. The National Strategy for Homeland Security. July 16, (2002): 30.
96 Rudner, “Protecting North America’s Energy Infrastructure Against Terrorism,” 432.
97 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 29.
98 Canadian Electricity Association, “The Integrated Electricity System: Sustainable Electricity as the Foundation for Economic Recovery in North America” (2010): 10.
99 Ibid.
100 BBC News. “Canada to withdraw from Kyoto Protocol,” December 13, 2011. http://www.bbc.co.uk/news/world-us-canada-16151310
101 US EIA, “Annual Energy Outlook 2011,” 56.
102 Ibid.
103 Ibid., 55.
104 Ibid., 56.
105 Ibid., 50.
106 bid., 27.
107 US Department of State, “US-Mexico Transboundary Hydrocarbons Agreement Fact Sheet,” February 20, 2012. http://www.state.gov/r/pa/prs/ps/2012/02/184235.htm
108 US Department of State, “US-Mexico Transboundary Hydrocarbons Agreement Fact Sheet,” February 20, 2012. http://www.state.gov/r/pa/prs/ps/2012/02/184235.htmIbid.
109 The White House Office of the Press Secretary, “President Obama Announces Major Initiative to Spur Biofuels Industry and Enhance America’s Energy Security,” August 16, 2011. http://www.whitehouse.gov/the-press-office/2011/08/16/president-obama-announces-major-initiative-spur-biofuels-industry-and-en
110 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 13.
111 US EIA, “Annual Energy Outlook 2011,” 75.
112 Ibid., 50.
113 Klein, Tobin, and Angevine, “Continental Energy Strategy,” 19.
114 Ibid., 18.