The Accidental Superpower

by Peter Zeihan

  A good example is what happened in the natural gas markets during the vortex winter of 2013–2014. The system began the winter with near record-high storage levels, but repeated bouts of bitter weather depleted those stores to near record lows. In times past natural gas prices would have doubled (or more) and stayed high for years. Instead, prices rose by only 50 percent, and the price spike lasted for just two weeks.

  The result? While natural gas prices are hardly guaranteed to remain below $6 per 1,000 feet, any sustained move above $6 will lead to massive—and above all rapid—new output that will push prices back below $6. The United States is looking at decades of low natural gas prices—less than half what they are in Europe and one-third what they are in Japan.

  The stickiness of natural gas’s very low prices has a raft of implications. The most direct impact of these price crashes is that utilities are switching wholesale to natural gas whenever and wherever they can. With the boom in cheap input fuels, electricity prices in shale-producing regions started going down in 2008 with such speed that U.S. average national electricity prices have flatlined and are now the cheapest in the developed world. High shale production regions like Texas have seen prices fall by one-fifth. Only regions that have chosen to not produce shale (the Pacific coast) or that lack the infrastructure to import shale gas from other parts of the country (the Southeast) are still seeing rising electricity prices.

  Such cheap natural gas and cheap electricity is a massive boon for any industry, but certain ones will benefit more than most. Heavy chemicals, steel, aluminum, plastics, fertilizers, and manufacturing of all types—precisely the sort of jobs that shifted out of country during the 1990s and 2000s—are already returning to the United States, and the manufacturing sector alone has already added half a million jobs since 2008, in large part due to shale’s impact.

  One manufacturing subsector is particularly worthy of mention: 3-D printing (a.k.a. additive manufacturing). A 3-D printer sprays metal powder or plastic resin in a manner similar to how a laser printer sprays toner. But instead of spraying a single layer, it sprays thousands, one upon the other, until a three-dimensional object emerges. These objects can contain moving parts, hinges, and even disconnections (like a Swiss Army knife, mechanical clock, necklace, or even a firearm), and be printed in all one run.

  In most parts of the world 3-D printing is a fringe technology, but a number of characteristics make the merger of shale and 3-D printing particularly notable for the United States:

  • Because it does not use molds, 3-D printing only makes one item at a time. This encourages customization and generates opportunities for design jobs in a highly educated country like the United States, but the lack of assembly lines (no mass production) also means that 3-D printing isn’t very efficient from an electricity point of view. Cheap electricity—courtesy of shale—lets the United States have the best of both worlds.

  • Whether for replacing a part or simply deciding you want that thing now, 3-D printing doesn’t just cut out the middleman, it cuts out the Arab shipping company, the assembly facility in Vietnam, the component manufacturer in Korea, the steel foundry in Russia, and even the Mexican trucking company. Three-dimensional printing colocates manufacturing with consumption. The result is both a much slimmed-down supply chain and reduced need for transport fuels. If 3-D manufacturing captures but 1 percent of the market it will likely slice 50,000 bpd off of global oil consumption simply from transport savings.

  • Since you only print what you need, you can create objects that would not be possible with standard molds or injection manufacturing methods. Objects can be of nonstandard shapes, hollow, or even have moving parts and gears right off the printer. This largely eliminates materials waste, reducing the materials used by roughly half, while making the resulting object roughly twice as strong.

  • Specific industries that the United States already dominates in terms of supply and demand will benefit more from 3-D printing than other industries. Specifically I’m referring to industries in which production runs are in the dozens to thousands (rather than millions), where strength-to-weight ratios need to be as high as possible, where repairs are best carried out in hours rather than days, and where proprietary techniques need to be guarded behind a wall of intellectual property law and/or national security concerns. For aviation, automotive, medical, and defense industries, 3-D printing is the holy grail. Need to repair a piece of your Lexus or a jet engine? Don’t wait overnight for a part to be air-freighted in, just click print and be on your way in an hour or two. Stuck with a new tank design suffering with no end of glitches? Simply print out the intermittent development designs and reduce the development path from years to months. Have a patient with a shattered forearm? Just scan the undamaged forearm, invert the image, and print out a replacement bone.

  The newness of 3-D printing as an industry makes it difficult to predict just how far and how fast it will spread. Constant innovation is a forecaster’s biggest foe. But keep the following in mind: As of 2011, retail 3-D printers could only use plastics. As of 2013, some high-end retail printers could use metals, and printers that could use over two hundred different materials, running the gamut from paper to Teflon to crystal to stem cells, became available for machine shops and similar workplaces. In January 2014, the first multimaterial printers were released. At present they can “only” print out similar materials such as resins, plastics, and rubbers. But in a few years, materials like copper and silicon will be coming out of the same printer. At that point, you will be able to print your new computer at home. For American system designers, the sky will be the limit. For Asian computer-part manufacturers and everyone else in the supply chain that culminates with the American consumer, the floor will fall out.

  Experimental prototypes are now creating everything from engine blocks for car enthusiasts to foodstuffs on the International Space Station. Unlike shale, however, 3-D printing technology will certainly diffuse out from the United States, but because of shale, it will be most intensive in its U.S. application for at least a decade.

  The outstanding question is: How long can this last? We simply don’t know. Shale is the source rock from which all petroleum originates, so when the shale is tapped out the petroleum era is flat-out over. But shale is a very new industry using a technological package that hasn’t even been in the energy mainstream for a decade, and many of shale’s breakthroughs can be applied to preexisting petroleum fields, extending “conventional” production as well. Every time a cost—whether for exploration, drilling, fracking, or transport—is nudged down, petroleum’s sunset is delayed a bit more. Do we have centuries of additional supply? Probably not. What about decades? Probably so. We certainly have enough shale energy to deeply enhance the geopolitical and demographic trends that come to a head in the next few years.

  Scared New World: The United States Moves On

  The impacts of shale on the United States, American power, and therefore the wider world promise to be enormous. Most obviously, energy that is reliable, local, and—in the case of natural gas and electricity—remarkably affordable puts the United States in a category far above every other major developed power both economically and strategically. The Americans already enjoy a system only tenuously linked to the broader international system, and shale’s rise alone is set to cut the current account deficit in half. And that’s just from the energy import savings, to say nothing of shale’s attendant benefits to a whole host of economic sectors.

  As such, U.S. shale’s many effects have the potential to be disastrous on the broader global system. The United States has been the world’s largest energy importer for nearly all of the past thirty years. Now it will simply fall off the global energy map.

  That will have far more than “simply” a massive market impact. Think back to chapter 5 where we discussed how the Americans refashioned the global trade system in order to build and maintain a global alliance. Since almost none of the American allies were energy exporters, p
rotecting energy flows from the points of production to the points of consumption was part of the deal. The Americans guarded energy in order to enable trade, and enabled trade in order to have their alliance. America’s shale revolution is separating the Americans from a supply system the rest of their allies remain dependent upon. There is no grand scheme at work here, just the Americans falling into events and trends that are quickly hiving it off from the rest of the global system.

  But what is most disruptive is the timing. The Americans are backing away from Bretton Woods, the global demographic is inverting, and shale is paring back the single most energetic American connection to the wider world all at the same time. Any of these factors alone would shake the global system to its core. Together they will upend it completely.

  In the next chapter we’ll bring all of this together. It is nothing less than the end of the world we know and its replacement with something new… and chaotic.

  CHAPTER 8

  The Coming International Disorder

  Technology, Development, and the Modern World

  The current global system is downright bizarre by historical standards. For the first time, any country can access markets the world over without needing to guard any aspect of its supply chains—and in most cases, even its borders. What had been possible only for the major empires of the past can now be the core strategy for countries as diverse—and traditionally weak—as Uruguay, Korea, Honduras, Tunisia, and Cambodia. The Bretton Woods rules, and the American free trade strategy at its core, may be artificial and driven by strategic calculus, but they have resulted in the greatest era of peace and prosperity the world has ever known. Everyone can play the game of economic and social development, and play in relative safety.

  It is easy for us to forget how very different the past has been.

  Centuries of technological advances have created possibilities where few or none existed before. At their most basic, technologies allow people, if sufficiently armed with capital, to partially overcome their local geography and make it productive. The more difficult that geography—whether it be jungle, mountain, swamp, taiga, or desert—the more expensive it is to make it useful, and the more expensive to keep it useful.

  Economic and social development, then, are about figuring out how to use technology and capital, to find out not only what is possible but also feasible. Economists call this opportunity costs. For example, you may be able to build a road to the top of the mountain to reach a remote chalet, build it strong enough to withstand spring floods, plow it to keep it open in the winter, and repair it and clear it of avalanche debris in the summer. But with those same resources you can build fifty times the length of road in flat lowlands and service several tens of thousands of people. Both tasks are possible, but only one is an efficient and productive use of resources and therefore the more feasible.

  Feasibility comes down to money. If you don’t have any spare cash, not a lot happens. If you are lucky enough to have access to credit, the question is how much does that access cost you? The lower the cost of the credit, the more options within your reach. It really isn’t any more complicated than that. In 2012, the average U.S. home price was about $250,000. With a 4 percent mortgage rate, that’s a monthly payment of $1,200. Increase the rate to 8 percent and the monthly payment is $1,800. Cheaper credit makes buying a home—or a larger home—a more feasible option. The same concept holds for economies writ large. If capital is available and affordable, there will be more activity: more consumption, more infrastructure, more development.

  Every country has a set volume of indigenous or domestic capital that it can apply to its own development, but if additional monies can be brought in from the outside, then more development can occur. In the world before deepwater transport, what capital generation existed came from trade and taxes in individual river valleys. Money was tight. Credit—if it existed—was expensive. The world changed slowly. The development line—the point where an integrated economic and political system gives way to the frontier or, considering the Hobbesian nature of fifteenth-century Europe, the front lines—was pretty damn close to home. The concept of foreign investment normally involved a foreign army and was most certainly not sought out. Human development clung to the river valleys, with small archipelagoes of nearby choice bits of land being linked into the riverine systems with short spurs of road. Only lands with the lowest development costs and highest outputs—lands that made absolute economic or strategic sense—were developed. Cities that grew according to this logic are Paris, Osaka, Stockholm, London, Genoa, Istanbul, Copenhagen, and Amsterdam.

  The dawn of deepwater technologies changed the world by allowing the European powers to reach out beyond their sequestered river systems and acquire empires. Borders in Europe remained (hotly) contested, but vast swaths of territories beyond Europe were brought into competing imperial systems. Money flowed back and forth between the seat of imperial power and these new provinces, each trading with and enriching the others. Additional money allowed for the digestion of additional lands, pushing back the development line on both sides of the relationship. Territories that may not have quite made the cut in the previous era could be added. Swamps along rivers were drained, rocks were removed from would-be farmland, walls were built to defend areas that were too exposed to justify development in the previous era of scarcer capital. Cities that sprang from this model are Buenos Aires, Sydney, New York City, Cape Town, Barcelona, Hamburg, Liverpool, Havana, and Guangzhou.

  The industrialization technologies triggered another evolution, causing the land to bloom with crops and new constructions in ways impossible before. The development line wasn’t so much pushed back (although it was) as redrawn. Instead of having isolated towns linked to a river valley by a single shoddy road, a rail line created a corridor of development between the two. The archipelagoes of lands merged—along with many of the lands between them—into far more integrated zones.

  On the global scale, industrialization allowed potential city sites to import everything they needed—steel, timber, even people and transport infrastructure—to create metropolises from scratch. The old rules of what was possible could be suspended if you were willing to commit enough capital. Such insta-cities could be built to command a strategic position, to metabolize heretofore stranded resources, or to convert a dinky backwater outpost into something grand. As industrialization gained ground and the production and consumption of goods were augmented by the production and consumption of services (from cars, sneakers, and TVs to movies, overnight delivery, and the Internet), urban populations became not simply a source of labor, but also revenue streams in their own right, due to their ability to generate income and capital. While so much more was possible, feasibility still constrained development. Some projects were so problematic that they didn’t justify investment—czarist Russia never industrialized, for example—and some places were quite literally a bridge too far. This is how the world worked right up until the end of World War II. Cities created or reinvented by these means include Moscow, São Paulo, Calgary, Manila, Singapore, and Denver.

  At that point the Americans’ tinkering with the structure of the global economy through Bretton Woods generated yet another evolution, pushing the development line still further out. With all of the advanced powers now in the same alliance, government outlays on defense plummeted, freeing up more resources for development. The advanced economies were now able to sell freely into the American market, resulting in vast inflows of capital creating yet more resources for development. Rivers were no longer required to generate economic growth because there was sufficient capital to develop transport systems from scratch. With such massive wealth flows, nearly all of the rich world’s available territories became developed. It was inevitable that some of it would leak out into the wider world, reaching into the now-former empires’ now-former colonies. The Cold War’s end catalyzed the process. History seemed to be accelerating. Santiago, Port Harcourt, Dhaka, Mexico City, Beijing, and
Seoul evolved into global points of growth.

  A few short years later, history seemed to speed up again. The maturation of the Boomer generation flooded an already capital-rich world with a tsunami of money. The aging Boomer generation produced so much excess capital that the line of development drawn by the industrial age was pushed back still further. A lot further. Following the most basic law of economics—supply and demand—the huge volume of capital found it difficult to generate high returns and so surged into any investment opportunity it could find. In the United States, the money found a vast sink in real estate, what in time would become known as subprime. In Europe, the onset of the euro allowed for easy lending policies in the Southern European regions that lacked previous experience in managing large-scale financial access, fostering what would become known as the European financial crisis. In Brazil, Russia, India, and China, the flood of capital contributed to the rise of the BRICs (as well as what will soon be known as the BRIC bust). Elsewhere across the world, locations that were previously only known as part of the who’s who of imperial overstretch became in-vogue investment destinations, cities like Lima, Dubai, Luanda, Wuhan, Bandar Abbas, Hanoi, and Mumbai.