President Obama with Saudi King Abdullah bin Abdulaziz ©Pete Souza/White House/Handout/Corbis
It is widely thought possible that within this decade, North America—taking the United States, Canada and Mexico together—will be able to supply its own energy needs. This prospect is already transforming the lens through which Americans view their country’s future, and relations with other governments globally.
Within the US, the gloom surrounding the slow recovery from the financial crisis is April 2014 Special report Barrels of confidence giving way to thoughts of growth, possibilities and a renaissance of American economic might. Abroad, the sense of reinvigoration appears to have emboldened foreign policy. Two former Bush administration national security officials, Robert Blackwill and Meghan O’Sullivan, recently argued in Foreign Affairs that “the energy boom promises to sharpen the instruments of US statecraft,” and that it is the beginning of a new era.
This “carbon confidence” is a far cry from George W Bush’s call for his country to break its addiction to oil in 2006— when US oil production was considered in terminal decline and gas imports were rising. Many attribute the about-face to the success of the unconventional (or “tight”) gas and oil revolution. With a combination of horizontal drilling and hydraulic fracturing (fracking)—a technique in which a mixture of water, sand and chemicals are used to fracture shale or other rocks, allowing trapped gas or oil out—the US increased its gas production by 30 per cent between 2006 and 2013, mainly in the south, midwest and northeast.
The US Energy Information Agency (EIA) predicts that natural gas production will grow steadily from the current level of 70bn cubic feet a day to more than 100bn by 2040. The discoveries have pushed down wellhead gas prices by around 60 per cent since 2006. This in turn has reversed the fall in oil production, by creating an incentive to drill for oil rather than gas. The oil find in the Bakken shale formation in North Dakota has been likened to the 1849 gold rush. US crude oil production has grown by two million barrels a day in the last three years, akin to the output of Brazil. The EIA forecasts a repeat of this feat by the end of 2016 mainly due to rising tight oil production.
Perhaps the most dramatic consequences would be in the US’s foreign relations. The old alliance, in which the US offered security for stable oil supplies, appears to be withering. In the Middle East, the US seems to have taken a more hands-off approach since the beginning of the Arab uprisings in 2011. It did not intervene to prevent the fall of President Hosni Mubarak of Egypt, a key Saudi ally—to the alarm of the Saudi royal family— and then wavered on Syria. Empowered by rising production at home, the US was also able to put the squeeze on Iran through tougher sanctions and then pursue a form of detente with Tehran, as Saudi Arabia’s rulers watched on in dismay.
Elsewhere, friends and rivals alike increasingly view the US with envy. Chinese officials now openly question the wisdom of their rising bills for importing fuel and the security of their investments abroad as the nation becomes more dependent on Middle East oil. In spite of large shale deposits of its own, a combination of geological, water, infrastructural and commercial challenges means that China’s unconventional revolution is likely to be some way off.
In Europe, the revival of US manufacturing has generated fierce debates over industrial competitiveness, casting doubt over the cost of switching to cleaner energy. Industry gas prices in the US were a quarter of those in the EU in 2012—giving credence to the idea that cheap energy is a powerful boost to recovery and growth. With lower gas prices helping to reduce coal’s share in the US power sector, the US exported more coal to the EU (especially to the Netherlands and the UK). EU coal use increased by 11 per cent between 2009 and 2012, pushing up emissions in the UK, for example.
Cheap gas in the US has inflicted chaos on EU energy and climate politics, undermining not only the shift to renewables but also to gas due to the cheaper coal exports. But it has helped revive the US appetite for climate policies. The recession prompted cut backs, efficiency has improved, and the power sector is using less coal; all these mean that the US appears on track to meet its target of reducing carbon emissions by 17 per cent against 2005 levels by 2020. That said, the surge in the production of shale oil as well as “gas to liquids” production (where gas is converted to diesel and other liquid fuels), together with depressed prices, could undo these incidental gains without more ambitious climate measures. Low prices have already led to the flaring of gas produced along with oil at the drillsite—as companies choose not to invest in the infrastructure to market it.
A key question is whether energy independence offers real strategic advantage for a superpower in an interdependent world. In theory, the US could help reduce EU dependence on Russian gas, for example, by selling it more gas. Recent events in the Ukraine could make the security case more attractive but exports would be tiny in comparison with Europe’s import needs. It would also make no economic sense because of the costs of liquefaction and shipping. Asian countries willing to pay the premium price would offer the only worthwhile market. US politics might also stand in the way; support for export restrictions remains, especially in the petrochemical and manufacturing sectors.
What is more, the fall in world oil prices anticipated by Blackwill and O’Sullivan will not give the US straightforward wins. Lower oil prices would alleviate pressure for allies like Japan and the EU, which are dependent on imports, but they could also kill the US shale oil sector. To maintain production from shale, more wells must continually be drilled. Production decisions in this capital-intensive business rely on heavy front-end financing from the private sector, which is driven by prices not federal policy. This also means that even with growing output, the US would not be in a position to quell global price pressure at will in a volatile market except by one-off releases of its strategic stocks. Maintaining spare capacity—or ramping up production at short notice—is not an option.
What the US does have today, however, for the first time in 40 years, is choice. Shale exploration has changed the psychology of government and business. Some in Washington are gripped by the heady belief that they are racing towards a future of economic buoyancy, unfettered by old strategic concerns. Others are more cautious—including the Obama administration, which is taking steps to repair the strained Saudi relationship; it proposed a $10.8bn arms deal with Saudi Arabia and the UAE as the nuclear deal with Iran was being forged.
Economic realities may also get in the way. In many parts of the world, holding energy prices low has weakened competitiveness for all but a handful of energy intensive sectors (think of Russia, Mexico, Venezuela, Iran, Saudi Arabia and Egypt, for example). Shale drilling may have brought wealth and employment to many, but the short-term nature of the drilling operations may lead to boom-bust cycles. In his new book Fueling Up, Trevor Houser warns that despite the powerful stimulus provided by the shale revolution more sectors stand to lose from exchange rate appreciation than they do to gain from low energy prices.
Ultimately, the Achilles heel of the US’s carbon triumphalism is low oil prices. Falling oil prices that would divert financing from US shale drilling are a distinct possibility now that China’s growth is slowing. Sustained prices below $85 per barrel would hit the industry hard. In contrast to the past, this is now where the interests of US and other oil producers align. The energy revolution means the US wants oil prices to stay high.
