America’s Energy Edge: The Geopolitical Consequences of the Shale Revolution

Is America’s shale-based energy revolution having at least one expected effect? Yes, say Robert Blackwill and Meghan O’Sullivan. In the case of global energy production, it’s facilitating a gradual shift away from traditional suppliers in Eurasia and the Middle East.

Only five years ago, the world’s supply of oil appeared to be peaking, and as conventional gas production declined in the United States, it seemed that the country would become dependent on costly natural gas imports. But in the years since, those predictions have proved spectacularly wrong. Global energy production has begun to shift away from traditional suppliers in Eurasia and the Middle East, as producers tap unconventional gas and oil resources around the world, from the waters of Australia, Brazil, Africa, and the Mediterranean to the oil sands of Alberta. The greatest revolution, however, has taken place in the United States, where producers have taken advantage of two newly viable technologies to unlock resources once deemed commercially infeasible: horizontal drilling, which allows wells to penetrate bands of shale deep underground, and hydraulic fracturing, or fracking, which uses the injection of high-pressure fluid to release gas and oil from rock formations.

The resulting uptick in energy production has been dramatic. Between 2007 and 2012, U.S. shale gas production rose by over 50 percent each year, and its share of total U.S. gas production jumped from five percent to 39 percent. Terminals once intended to bring foreign liquefied natural gas (LNG) to U.S. consumers are being reconfigured to export U.S. LNG abroad. Between 2007 and 2012, fracking also generated an 18-fold increase in U.S. production of what is known as light tight oil, high-quality petroleum found in shale or sandstone that can be released by fracking. This boom has succeeded in reversing the long decline in U.S. crude oil production, which grew by 50 percent between 2008 and 2013. Thanks to these developments, the United States is now poised to become an energy superpower. Last year, it surpassed Russia as the world’s leading energy producer, and by next year, according to projections by the International Energy Agency, it will overtake Saudi Arabia as the top producer of crude oil.

Much has been written lately about the discovery of new oil and gas deposits around the world, but other countries will not find it easy to replicate the United States’ success. The fracking revolution required more than just favorable geology; it also took financiers with a tolerance for risk, a property-rights regime that let landowners claim underground resources, a network of service providers and delivery infrastructure, and an industry structure characterized by thousands of entrepreneurs rather than a single national oil company. Although many countries possess the right rock, none, with the exception of Canada, boasts an industrial environment as favorable as that of the United States.

The American energy revolution does not just have commercial implications; it also has wide-reaching geopolitical consequences. Global energy trade maps are already being redrawn as U.S. imports continue to decline and exporters find new markets. Most West African oil, for example, now flows to Asia rather than to the United States. And as U.S. production continues to increase, it will put downward pressure on global oil and gas prices, thereby diminishing the geopolitical leverage that some energy suppliers have wielded for decades. Most energy-producing states that lack diversified economies, such as Russia and the Gulf monarchies, will lose out, whereas energy consumers, such as China, India, and other Asian states, stand to gain.

The most dramatic possible geopolitical consequence of the North American energy boom is that the increase in U.S. and Canadian oil production could disrupt the global price of oil — which could fall by 20 percent or more. Today, the price of oil is determined largely by the Organization of the Petroleum Exporting Countries, which regulates production levels among its member states. When there are unexpected production disruptions, OPEC countries (primarily Saudi Arabia) try to stabilize prices by ramping up their production, which reduces the global amount of spare production capacity. When spare capacity falls below two million barrels per day, the market gets jittery, and oil prices tend to spike upward. When the market sees spare capacity rise above roughly six million barrels a day, prices tend to fall. For the past five years or so, OPEC’s members have attempted to balance the need to fill their public coffers with the need to supply enough oil to keep the global economy humming, and they have managed to keep the price of oil at around $90 to $110 per barrel.

As additional North American oil floods the market, OPEC’s ability to control prices will be challenged. According to projections from the U.S. Energy Information Administration, between 2012 and 2020, the United States is expected to produce more than three million barrels of new petroleum and other liquid fuels each day, mainly from light tight oil. These new volumes, plus new supplies coming on line from Iraq and elsewhere, could cause a glut in supply, which would push prices down — especially as global oil demand shrinks due to improved efficiency or slower economic growth. In that event, OPEC could have a hard time maintaining discipline among its members, few of which are willing to curb their oil production in the face of burgeoning social demands and political uncertainty. Persistently lower prices would create shortfalls in the revenues they need to fund their expenditures.

Of all the governments likely to be hit hard, Moscow has the most to lose. Although Russia possesses large reserves of shale oil that it could eventually develop, the global supply shift will weaken the country in the short term. The influx of North American gas to the market will not entirely free the rest of Europe from Russia’s influence, since Russia will remain the continent’s largest energy supplier. But additional suppliers will give European customers leverage they can use to negotiate better terms with Russian producers, as they managed to do in 2010 and 2011. Europe will gain most from the change if it further integrates its natural gas market and builds more LNG terminals to import gas; such moves could help it ward off crises like those that occurred when Russia cut off gas supplies to Ukraine in 2006 and 2009. The development of Europe’s own considerable shale resources would help even more.

A sustained drop in the price of oil, meanwhile, could destabilize Russia’s political system. Even with the current price near $100 per barrel, the Kremlin has scaled back its official expectations of annual economic growth over the coming decade to around 1.8 percent and begun to make budget cuts. If prices fall further, Russia could exhaust its stabilization fund, which would force it to make draconian budget reductions. Russian President Vladimir Putin’s influence could diminish, creating new openings for his political opponents at home and making Moscow look weak abroad.

Although the West might welcome the thought of Russia under such strain, a weaker Russia will not necessarily mean a less challenging Russia. Moscow is already trying to compensate for losses in Europe by making stronger inroads into Asia and the global LNG market, and it will have every reason to actively counter Europe’s efforts to develop its own resources. Indeed, Russia’s state-run media, the state-owned gas company Gazprom, and even Putin himself have warned of the environmental dangers of fracking in Europe — which is, as The Guardian has put it, “an odd phenomenon in a country that usually keeps ecological concerns at the bottom of its agenda.” To discourage European investment in the infrastructure needed to import LNG, Russia may also preemptively offer its European customers more favorable gas deals, as it did for Ukraine at the end of 2013. More dramatically, should low energy prices undermine Putin and empower more nationalist forces in the country, Russia could seek to secure its regional influence in more direct ways — even through the projection of military power.

The North American energy revolution is here, it is big, and it will only increase in importance as the United States comes close to becoming a net energy exporter, which is set to happen around 2020. The resulting shift in global energy supplies will benefit consuming countries and erode the power of traditional producers. These developments could also undercut OPEC’s traditional role as the manager of global energy prices, perhaps to the extent that energy prices plummet. Such a disturbance could, in turn, cascade through all countries that depend on hydrocarbons for their public finances. Even without such a dramatic drop in prices, the global flow of energy will continue to be transformed — and, with it, economic and geopolitical relationships.

The United States, meanwhile, will be uniquely positioned to profit from the shift and seize new opportunities. The energy boom will add fuel to the country’s economic revitalization, and the reduction of its dependence on energy imports will give it some measure of greater diplomatic freedom and influence. The energy boom will not solve all the challenges facing U.S. policymakers: Washington still must manage the aftermath of more than a decade of war in Afghanistan and Iraq, its own fiscal profligacy, hyperpartisanship along the Potomac, the erosion of trust among many allies in the wake of revelations about U.S. surveillance, and the rise of China. That said, the huge boom in U.S. oil and gas production, combined with the country’s other enduring sources of military, economic, and cultural strength, should enhance U.S. global leadership in the years to come — but only if Washington protects the sources of this newfound strength at home and takes advantage of new opportunities to protect its enduring interests abroad.

Full article: America’s Energy Edge: The Geopolitical Consequences of the Shale Revolution (ISN)

One response to “America’s Energy Edge: The Geopolitical Consequences of the Shale Revolution

  1. Why would the US oil produces act any differently than Russia or OPEC when it comes to controlling the market and sustaining prices. We are a net Gasoline exporter now and the prices are still high.