It is 1979 and each day thousands of U.S. motorists are waiting in long lines for gasoline. The Iranian Revolution has resulted in lower oil exports and, combined with the Carter Administration's decision to ban Iranian oil imports, panic had ensued over the availability of gasoline. This was not a new situation for U.S. consumers. Just six years earlier, the Yom Kippur War had led OPEC to ban oil exports to countries that supported Israel in the war. By the time the oil embargo ended five months later, gasoline prices in the U.S. had more than doubled.

See Also: The Energy Revolution and US Manufacturing

If there was a lesson from the 1970s for the United States and its citizens, it was that the country was dependent on Saudi Arabia, Venezuela and a host of other nations to slake its insatiable thirst for oil. For the next 40 years, FedEx CEO Fred Smith recently noted, the U.S. has "transferred more wealth… than any entity in history" in order to meet its energy needs.

But jump ahead to November 2012 and it seems almost a case of science fiction that the International Energy Agency (IEA) would issue a report projecting that the U.S. will become "almost self-sufficient in energy, in net terms, by 2035." 

What has changed, of course, is one of the most profound technology innovations of the 20th century. Using a process called hydraulic fracturing, or fracking, the U.S. has been able to tap vast new supplies of oil and gas. Sometime around 2020, IEA estimates, the U.S. will overtake Saudi Arabia as the world's largest oil producer and also will see the benefits of greatly improved transportation fuel efficiency. "The result is a continued fall in U.S. oil imports, to the extent that North America becomes a net oil exporter around 2030," IEA expects.

The outlook for natural gas is even more optimistic. IEA forecasts that the U.S. will be a net exporter of natural gas by 2020. And just 10 years later, the agency states, natural gas will become the largest fuel source in the U.S. energy mix.

While such a forecast has caused some observers to discuss a period of "energy independence" for the U.S., many consider that a near impossibility in an interconnected global economy. Anthony Cordesman of the Center for Strategic and International Studies, for example, notes that the U.S. will be importing energy for at least the next decade and will be "dependent on the health of a broader global economy that is becoming steadily more dependent on the security [of] Gulf energy exports." Cordesman also points out that optimistic energy projections "do not adequately consider the wisdom of a 'deplete America first' approach to oil and gas procurement."

The U.S. Energy Information Agency is not quite as bold as its international counterpart, but it too projects a major increase in U.S. energy production out to 2040. However, it also estimates that domestic consumption of energy will continue to rise, though at a slower pace, and that consumption will continue to exceed production.

Currently, there is about a 20% gap between U.S. energy consumption and what the nation can produce. Closing this 20% gap will not be easy, says Michael Peterson, managing director and senior equity analyst on the energy and natural resources research team at investment bank MLV & Co.

"Doubling oil production or cutting transportation demand by 50% would not be enough. Increasing coal or natural gas output by 50%, all for export, would not be sufficient. Reducing demand by 20% within a decade also would not be enough. The point is that progress on each of these fronts will be necessary to balance our portfolio," he explains.

Energy Provides Manufacturers a Competitive Advantage

The energy revolution underway in the U.S. already is having a significant impact on the U.S. economy. Last year, according to an IHS report, unconventional oil and natural gas supported a value chain that accounted for 2.1 million jobs and contributed $283 billion to U.S. gross domestic product. By 2020, IHS estimates the economic benefits will grow to 3.3 million jobs and $468 billion in GDP contributions.

The energy revolution is helping U.S. manufacturers become more competitive. Consider that from 2002 to 2006, energy expenditures by manufacturers rose 29% even though they purchased 15% less energy. But from 2006 to 2010, EIA reports, manufacturers' energy expenditures fell 16% as the amount of energy they purchased dropped just 6%. A major factor in this cost drop: Manufacturers on average saw a 36% decrease in the natural gas price they paid between 2006 and 2010, from $7.59 to $4.83 per million Btu.

"For manufacturers, the relatively cheap price of natural gas is a huge domestic competitive advantage," says Kelly Sims Gallagher, director of the Center for International Environment and Resource Policy at Tufts University's Fletcher School of Law and Diplomacy. "Our competitors in Asia are facing triple or quadruple prices for gas, which they are largely importing."

Marlin Steel Wire Products, a Baltimore manufacturer of wire baskets, reflects the benefits of the natural gas boom for many U.S. manufacturers. The company has seen a 50% drop in its heating bills compared to peak prices a few years ago. President Drew Greenblatt told a House energy subcommittee in June that Marlin Steel's business also had picked up as it sold to companies involved in energy extraction and development such as Schlumberger, Timken and Caterpillar.

"The energy boost is contributing to our own purchases of steel from Indiana and Pennsylvania, to our need to add overtime for our workers in Baltimore, and to our ability to invest in additional automation from robot makers in Illinois and Connecticut to bend wire and cut and shape sheet metal," said Greenblatt.

How important will the U.S. energy advantage be for manufacturers? In a recent report, Boston Consulting Group pointed out that by 2015, the U.S. will enjoy a cost advantage of 60% to 70% for natural gas compared to Europe and Japan, and electricity will be 40% to 70% cheaper than its trading partners.

With its cheaper energy costs, the U.S. can expect to increase exports in seven industrial categories, BCG forecasts, including chemicals, machinery and transportation equipment. For example, BCG projects that the U.S. will gain $7 billion to $12 billion in chemical exports from Europe and Japan. Compared to Germany, chemical production costs in the U.S. will be 29% less expensive by 2015.

"The low cost of U.S.-produced natural gas, an important feedstock in chemicals, will be the big reason," says Justin Rose, a BCG partner.

What will the rise in domestic energy production and manufacturing do to America's enormous trade deficit? IHS projects that the trade deficit will be reduced by more than $164 billion by 2020.