In Lewis Carroll’s Through the Looking Glass, the White Queen tells Alice that in her youth she could believe as many as six impossible things before breakfast. If she had been looking at recent projections from the International Energy Agency and the U.S. Energy Information Administration (EIA), she might have made it seven: sometime in the not-too-distant future, U.S. energy exports could be passing in through the Straits of Hormuz.
That the global energy landscape is changing is now conventional wisdom: technology developments in drilling techniques have unlocked vast quantities of previously uneconomic “unconventional” oil and gas, meaning that U.S. is on track to increase oil production this year at its fastest rate on record. Natural gas, a commodity we thought we would have to be importing just a few years ago, is now so abundant that it is too cheap to produce in many parts of the country, and there are plans afoot to export it in the form of LNG. Much has been made of the potential for U.S. energy independence – a chimerical concept both practically (we are still likely to import at least half of our crude oil for the foreseeable future) and economically (even in the unlikely event that the U.S. ever produces as many barrels of oil as it consumes, domestic consumers will still be exposed to price shocks as long the country remains integrated in the global economy).
But the economic and political benefits of the hydrocarbon boom are real. The 760,000 barrels a day of added domestic crude production in 2012 will make a significant dent in the trade deficit. The shale gas bonanza has spared us the fate of Japan, Korea and other countries that are paying four to five times as much as US consumers for their gas. On the geopolitical front, the strategic value of U.S. oil and gas for are attracting attention. Last week, Senator Richard Lugar unveiled legislation proposing that the U.S. use LNG exports to help our import-dependent NATO allies. Last month OPEC admitted that North America shale resources are likely to play an increasingly important role among its competition. And just this week, Anne-Marie Slaughter, former Director of Policy Planning at the U.S. State Department called the US energy resurgence “the most important geopolitical trend out there”.
When looked at in the context of broader supply and demand trends, there is some justification for this claim. At the same time that U.S. supply is surging, domestic demand – like that elsewhere throughout the OECD – is leveling out or falling. Meanwhile, non-OECD demand for oil and gas is rising rapidly. While much is made of the role of India and China in this story, one of the fastest growing sources of demand are OPEC supplier states of the Middle East. At around 3 million barrels per day, Saudi Arabia’s oil consumption is already approaching that of India. This summer, the kingdom was burning as much as 1 million barrels a day just for power generation at a huge cost of forgone revenue. The UAE, the country with the world’s seventh largest reserves of natural gas, is already a net importer of the commodity. So is Kuwait, which already buys LNG during the summer months and is expected to need year-round supplies from 2013.
As populations, industries, and demand for (subsidized) electricity in the region is projected to grow, the trend is set to continue. Provision of sufficient electricity and water - made from power-intensive desalination facilities – to citizens will be all the more important as governments in the region try to ride out the aftermath of the Arab Spring. With tight fiscal budgets they can ill-afford to continue burning valuable oil to keep the lights on. While serious efforts are being made to develop and deploy civil nuclear power and renewable energy to meet the challenge, the scale of the requirements (an additional 30,000 megawatts by 2020 in Saudi Arabia alone), will require a significant contribution from natural gas. (Qatar, which is the world’s largest producer of LNG and is realizing very handsome profits from selling it to Asia, has very little incentive to sell at a discount to its larger regional neighbors, who, in any case, have little inclination to look for favors from their smaller peer).
Which brings us back to the United States. The U.S. Department of Energy is currently reviewing 15 applications from companies looking to export LNG from the lower 48 states. It is already clear that the process for approval of these applications – especially to countries with which the US does not have a free trade agreement – will be a politically contentious one. And even if all applications are permitted, it is highly unlikely there will be a market for all of the volumes seeking export. Nevertheless, EIA recently doubled the amount of U.S. LNG exports it sees in the global market by 2027. Where that supply goes is still an open question, but it is sure to go to where it is needed. And few countries need it more than those in the Middle East. As the U.S. tries to manage its relative decline and reorient its foreign policy in light of the Asian “pivot” and the Arab Spring, it may find itself in the extraordinary position of being able to invert its signature strategic weakness of recent decades by using energy exports to the Middle East as a source of influence and economic strength. Curiouser and curiouser, as Alice might say.