While the world’s major energy producers, on the whole, have reasons to worry about the unconventional energy boom, energy-importing countries can look forward to benefits unexpected just a few years ago. Of course, lower energy prices would be an economic blessing for energy-importing countries. Just as the spike in the price of oil following the 1973 OPEC embargo created severe difficulties for the developing world, saddling it with debt that lasted at least a decade, a decline in the price of energy would be a boon for such economies; it is a transfer of real income from energy producers to consumers. China and India in particular, given their anticipated growth in oil demand of 40 percent and 55 percent, respectively, would find themselves better equipped to meet energy needs while simultaneously tending to other pressing fiscal challenges.36 This is true as well of Japan and Korea, which import most of their energy.
China also stands to take advantage of the energy boom in other ways, even if we discount current efforts to access its own very substantial reserves of shale gas (there are issues with complex geology, lack of water for fracking, deep deposits, pushback from farmers, and high cost). As the world’s largest importer of oil and largest consumer of energy in the world, China will benefit from the downward pressure on price that higher U.S. (and Canadian and Argentine) LTO supply will provide.37 Less obvious but equally important, the shale revolution could compel Beijing to alter how it engages in commodity-rich states.38 Over the long term, if China is able to pilot its own planned shale extraction programs successfully, Beijing could lessen its reliance on African and Middle East countries that provide the bulk of current energy supplies.39 No longer would China need to offer aid or investments to backstop uninterrupted energy flows from Africa and elsewhere. But such a prospect would be in the far distant future, if it ever occurs. Both oil and gas demand will grow substantially in China, and it is an open issue whether Chinese shale gas will be significant or even competitive with Russian/Kazakh pipeline gas and LNG imports. As far as LTO is concerned, China does not seem to have the best rocks, so for the foreseeable future it will keep importing either crude from the Gulf or Russia (to be refined in joint-venture refineries) or oil products from the Gulf or Singapore.
In addition, the unconventional revolution could provide an unexpected spur to better relations between Russia and China, relations in which China has the strong upper hand. For decades, these two countries—despite the obvious rational basis for a long-term partnership between the world’s largest energy producer and world’s largest energy consumer, which share a 2,600-mile border—have struggled to come together for a common purpose. History, suspicion, and ideology continue to pose serious challenges. However, Russia will increasingly need to secure energy markets in the East to compensate for the unconventional energy revolution and Europe’s move away from Russian gas exports, and China requires greater sources of energy to meet the burgeoning demand that underpins its domestic growth. While progress is slow, all signs point to the fact that Moscow and Beijing are moving closer together, not further apart, on long-stalled energy deals and pipelines.40 Take the $400 billion gas deal China and Russia signed in May 2014. The contract between Gazprom and China National Petroleum Corporation runs for thirty years and requires the construction of pipelines and other infrastructure that will move 38 billion cubic meters of gas per year to China. Once implemented, such energy deals could provide the basis for a more extensive geopolitical relationship between Beijing and Moscow, with China in the dominant position and Russia making unprecedented concessions to Beijing in the context of pressure from the West.
Other friendly Asian countries, such as Japan, South Korea, and India, are also looking forward to more LTO and natural gas coming into global energy markets.41 These Asian countries eagerly anticipate the explosion in global LNG expected in coming years. While not the main source of their enthusiasm, the potentially dramatic uptick in gas and oil being transported through the South China Sea will increase the costs of a conflict there (for China and others) and could, depending on the character of Beijing’s foreign policies, provide additional incentives for cooperation. But these countries have even greater hopes that increased liquidity in the gas market and the growth of a spot market will force down the price Asian nations currently pay for gas. Similar to Gazprom’s European export price, Asian LNG prices are mostly oil-linked, so higher LTO supply from the United States, lowering world oil prices, will also lower Asian LNG prices—as will U.S. LNG exports to Asia.
The Sources of American Advantage
While other countries will have to adapt to a new energy landscape, the United States will be uniquely positioned among the major powers to define and benefit from these developments. How well American leaders understand, articulate, and leverage that strength will help define the geopolitics of the coming era.
Most fundamentally, unconventional energy will make the U.S. economy stronger. The North American energy revolution will continue to boost U.S. GDP through three channels. First and most obvious, the rapid expansion of North American energy production will create new wealth and generate new jobs in the energy sector; IHS, a global energy consultancy, assesses that the unconventional energy boom supported 2.1 million jobs in the United States in 2012. Second, since the United States has one of the lowest gas costs in the world, American manufacturers are competitively advantaged in any process that relies primarily upon gas for feedstock. Energy-intensive industries such as petrochemicals and even steel—which make up over half of the U.S. manufacturing sector, measured by output—are already receiving a competitive if modest boost. In just one sign of this resurgence in U.S. petrochemicals, major players such as Dow have announced plans to build new facilities and expand current production that will increase overall U.S. ethylene production by 40 percent.42 Third, the energy boom is fueling indirect gains in terms of infrastructure investment, construction, and services. All told, the energy boom could boost U.S. GDP between 1 to 4 percent, depending on the price of oil.43 Naturally, some of these gains in employment and investment will fluctuate over time as higher LTO output drives world oil prices down and leads to a contraction in U.S. oil and gas drilling until a new supply-demand equilibrium is reached. (Indeed, since summer 2014, the U.S. oil industry has cut costs substantially and shed almost 86,000 jobs).44
U.S. policy makers will need to forge a nuanced and nonpartisan understanding of the significance of this new geoeconomic strength for America’s position in the world. The North American energy revolution should help put to rest narratives of American “declinism” at home and in foreign capitals from Beijing to Berlin. The lessened requirement for overseas energy supplies—and the reduced dependence on producer countries with which the United States has prickly, volatile relations—will increase America’s strategic self-confidence in addition to boosting its economy. One might already detect a new candor, for instance, in the way the United States is publicly venting its frustration over the steady financing from countries such as Saudi Arabia, Qatar, and others that lent significant early support to radical Islamists in Syria and Iraq.45 And in the absence of the North American energy boom, it is unlikely that Washington would have felt the same leeway to move as swiftly as it did to sanction Russia in the wake of the latter’s Ukraine intervention.
However, as noted earlier, declining dependence on energy imports should not be confused with full energy independence from developments beyond American shores. The United States will remain linked to globalized energy markets, and it will also have the opportunity to play a greater role. As net imports of crude oil drop, U.S. oil production will continue to climb, allowing for increased oil exports across the global energy market.46 But any dramatic disruption of global oil supply would still ultimately impact the price at the pump in the United States and derail overall global growth. This means that U.S. interests in preserving stable international energy markets will endure. Nowhere is this truer than in the Middle East, where the United States will continue to have vital nationa
l interests, including counterterrorism, counterproliferation, and overall regional security to help protect our allies in the region (such as Israel) and ensure global flows of energy.47
Against this backdrop, U.S. leaders will need to explain clearly and consistently—to both the American people and audiences abroad—that the North American energy revolution will not change the national interests of the United States (a topic examined in Chapter 10). The United States will remain the most powerful country by almost any measure, yet it cannot isolate itself from shocks to the globalized economy—even if its more flexible economy and continued dollar pricing for energy will minimize the relative impact of these shocks. The United States will still have an enduring national interest, therefore, in protecting the global commons, such as the major sea-lanes upon which trade—of energy and other goods—flows. Neither the American public nor allies or adversaries overseas should mistakenly conclude that North American LTO will propel the United States to disengage from the world. Washington will have to reassure the world—and especially its partners in the Middle East—of this fact, given the coincidence of the timing of the North American energy revolution with the announced pivot toward Asia and uncertainty surrounding American policy toward the region.
At the same time, U.S. administrations will need to commit themselves to protecting this emerging energy largesse. So far it has been almost exclusively private sector players who have driven the North American energy revolution, with the vast majority of activity occurring on private rather than federal lands.48 Nonetheless, a supportive legal and regulatory environment was critical to accelerating these developments. Leaders at the state and federal levels will be challenged to find the right balance between legitimate concerns over environmental and other risks linked to fracking and the overall economic and geoeconomic benefits.49 Similarly, the United States will face the necessity of adapting old energy infrastructure and building new infrastructure in order to harness fully the unconventional oil and gas developments.
Sharpening Geoeconomic Instruments
The North American energy revolution promises to sharpen U.S. instruments for geoeconomic statecraft: sanctions, trade negotiations, reassurance of allies, and negotiation with rivals. Recent experience with Iran suggests how important the increased diversification of energy supplies could be in eroding energy suppliers’ market leverage. Sanctions have been denigrated since the end of the Cold War as “chicken soup diplomacy”—measures taken to make the imposer of sanctions feel good about a situation that does not merit military force. The unprecedented sanctions against Iran, however, would have been nearly impossible to put in place in the absence of the North American energy boom.50
Unlike less successful earlier sanctions against Iran, Iraq, Sudan, and Libya that were instituted during oil gluts, the international community placed wide-ranging sanctions on Iran in the context of a tight oil market with high prices. Getting the support of allies and other countries reluctant to impose such robust geoeconomic measures on Iran required a credible case that a removal of Iranian oil from the international market would not cause a spike in oil prices. U.S. legislation even contained a provision allowing the administration to waive the implementation of certain sanctions against consumers of Iranian oil if it judged that further removal of Iranian oil supplies from the global market would cause economic distress by driving up prices. But President Obama did not have to use this provision. Steadily increasing U.S. LTO production compensated for the over 1 million barrels per day of Iranian oil that came off the market. The administration then assuaged fears of oil price spikes and ultimately won support for the rigid and exacting sanctions regime, which significantly damaged the Iranian economy and pushed Tehran first to the negotiating table and then to an agreement. It remains to be seen if this episode was a historical oddity or a talisman for the future.
The U.S. energy revival also provides U.S. trade negotiators with a new instrument. At this writing, and as discussed at length in Chapter 7, Washington is immersed in engineering two major multilateral trade deals, one with the European Union and the other with a number of Pacific countries. American law favors natural gas exports to countries with which the United States has Free Trade Agreements (FTAs). Applications for LNG terminals intended to ship gas to countries with FTAs are automatically approved, while those to all other nations require a review to determine whether such trade is in the national interest. Given the intense desire of many countries in Asia and Europe to diversify their sources of energy by including U.S. natural gas exports in their mix, achieving this special trade status holds extra value. In fact, the link between FTAs and approvals for the export of natural gas was a factor in convincing Japan—hungry for gas in the wake of the Fukushima disaster that took its entire nuclear power infrastructure offline—to join the TPP talks.
The United States has the potential to use energy diplomacy as a new geoeconomic instrument for reinforcing alliance and partner relationships. Take Poland and Ukraine—two countries that, with some help, could diversify their energy supplies and reduce their dependence on Russia by developing their shale gas and oil resources. If EU politics and regulations permit, development of Poland’s huge shale gas resources could allow that country to emerge as one of the star economies of Europe—and therefore all the better equipped to push back against a newly hostile Kremlin.51 The Polish economy, currently the sixth-largest in Europe, has been growing rapidly for the last two decades at more than 4 percent per year—a faster rate than any other EU nation.52 In 2013, Poland produced 4.2 billion cubic meters of conventional gas while importing 9.6 billion cubic meters from Russia and 1.8 billion cubic meters from the rest of Europe. With roughly 60 percent of its gas currently coming from Russia, Poland has aggressively sought out international help to develop its shale resources, which are among the largest in Europe.53 But, absent outside help, the outlook for both Poland and Ukraine is gloomy. As of late 2015, both countries are making little or no actual progress as far as shale developments are concerned—in Poland because the rocks are not promising, and in Ukraine because of conflict where the rocks are located.
Looking to the future, the United States could also use its shale energy edge to reassure allies under pressure from energy suppliers. Imagine situations in which Russia again attempts to obtain geoeconomic leverage over countries in Eastern Europe by restricting gas supplies or linking political positions to the free flow of energy at reasonable rates. The United States could signal support for any allies under such pressure through well-timed and public delegations of private sector energy experts and investors aimed at assisting the country to develop its own shale resources. Although results would not be immediate, the development of shale resources takes years even in the most favorable environments—their presence could nonetheless provide a public symbol of American geoeconomic support and solidarity.
Similarly, the United States will be able to tap into its unconventional energy expertise as a new element in its broader diplomatic engagement with other countries ranging from Argentina and Algeria to, most importantly, China. The United States has multiple, diverse interests with China—but, at least in the realm of energy security, Washington’s and Beijing’s interests are more similar than not. As massive consumers of energy, both countries have an interest in a stable and growing global economy, which depends in part on the reliable flow of energy at reasonable rates. They also share the goal of finding ways to reduce greenhouse gas emissions to minimize the impact of economic activity upon the climate. Given its vast and expanding demand for energy, Chinese energy policy is effectively “all of the above”—involving a diversified portfolio of oil, gas, hydroelectric, nuclear, coal, and renewables. As the United States has demonstrated, the retirement of coal power plants or their conversion to gas has been the single biggest driver for rapidly reducing greenhouse gas emissions. These common interests in diversifying energy supplies and reducing greenhouse gas emissions point to an energy-economics nexus tha
t provides an avenue for U.S.-Chinese collaboration.
Onlookers in Beijing see the U.S. shale revolution as an opportunity that can, in due course, be exported to China with equally successful results. However, as noted earlier, China’s rocks are not especially good, and most of the issues the PRC faces are aboveground: institutional problems to which solutions cannot be imported, as they conflict with the way the Chinese economy and society are organized.54 Given the important role the United States plays in the Middle East and in protecting the global commons upon which China relies for the free flow of energy, future dialogues could be expanded beyond unconventional developments.55 Such energy dialogues have already begun, in fact, yielding a joint U.S.-China announcement on climate change and clean energy cooperation at a November 2014 summit; depending on China’s external behavior, these should be expanded.56 Conversely, a hostile China would give Washington few incentives to assist Beijing in confronting its profound energy challenges.
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