The rapid rise in output of natural gas and, more recently, oil in the United States is transforming the country’s energy and economic landscape.
These production booms are revolutionary, but not in the way that many people think. Experts, for instance, argue that an increase in North American energy self-sufficiency will lead to equally drastic changes in geopolitics.
Suddenly having a great wealth of domestically produced gas and, increasingly, oil, the argument follows, will allow the United States to look inward and take less interest in international affairs, including those of the politically challenging countries that produce oil and natural gas in the Middle East, Africa and elsewhere.
This is unlikely to happen. Despite more production from shale deposits like the Bakken in North Dakota, oil’s share of total U.S. energy demand is expected to decrease only to 32 percent from 37 percent by 2035. Natural gas will increase its share to 26 percent from 25 percent and renewables will grow to 11 percent from 7 percent, according to the U.S. Energy Information Administration.
The most strategic factor in American consumption will remain the price of oil and the effect of disruptions on the U.S. and the global economy, not the source or quantity of U.S. imports.
The boom will have many economic benefits. The U.S. balance of trade will improve and producing states will enjoy job growth and revenues. The United States will also grow as a refining center, producing the clean diesel-based fuels of the present and future for both consumption at home and export to Europe and the Western Hemisphere.
The United States will also see a spurt of infrastructure building as the country builds the pipelines and rail lines to move energy from West to East and from North to South. U.S. oil supplies will now be physically more secure, with weatherproof pipelines from Canada and the northern states.
In another big change, the United States will have much greater ability to make up for any import disruption through the country’s strategic reserves of oil.
Former Brookings Expert
President - Goldwyn Global Strategies, LLC
The Strategic Petroleum Reserve, which stores oil in salt caverns, currently has 80 days of import cover. But if U.S. imports fell to 6 million barrels a day from 8.7 million barrels a day now, the S.P.R. would have 116 days of cover.
The reduced U.S. dependence on crude imports does not mean an end to history. The issues of price volatility, diversity of supply and helping U.S. friends and allies to be free from monopolistic pricing or coercive supply arrangements will remain as vital 20 years from now as they are today.
Reduced oil imports would not provide immunity from supply disruptions. Indeed, as has been seen since the advent of the Arab Spring political upheaval, the effects of useful increases in U.S. production can be overwhelmed by disruptions in producing countries.
Prices are set globally. In 2011 the Libyan uprising caused a swift disruption in supply. The lack of much excess capacity to make up for more outages led to prices that further restrained already weak economic growth in the United States and Europe.
Saudi Arabia ramped up production, and the International Energy Agency, based in Paris, and the United States agreed on an emergency release of strategic reserves.
This year, Iran’s oil exports have declined by almost one million barrels a day, the result of surprisingly effective financial sanctions and the effects of an impending European Union embargo.
But unprecedented — and essential — political cohesion to counter the threat posed by Iran’s nuclear program came at a price. Reduced Iranian exports and other outages pushed Brent crude prices to around $120 a barrel and U.S. gasoline prices close to $4 a gallon.
To help countries, mostly in Asia, that had been large customers for Iranian oil, Saudi Arabia both increased production and reportedly provided discounts on oil sales. Iraq and Libya revived their production. Washington hinted at another release of S.P.R. crude to discourage speculation in the markets.
The fact that U.S. production rose 3.1 percent in 2011 from a year earlier, with an expected increase this year of 10.7 percent, was immaterial to managing these disruptions.
As long as spare capacity, the world’s buffer against outages, is thin and supply disruptions can harm economies or allow countries to use oil as a weapon, oil will remain strategic.
Throughout history, the United States has focused high-level diplomatic attention to ensure that there are diverse sources of fuel — even far from our shores.
Washington has had special envoys for Caspian Basin diplomacy for 14 years without importing a drop of oil or a whiff of gas from the region, because the autonomy of those countries and a Europe with freedom of choice of suppliers are strategic foreign policy interests.
Likewise, the stability of Nigeria and its neighbors matters for reasons that go well beyond protecting U.S. investments there, or the 800,000 barrels a day of Nigerian oil imported to the United States. Nigeria’s stability and prosperity affect the whole of West Africa and so is vital for the United States.
There are many examples of U.S. foreign policy interests being intertwined with oil. The evolution of Iraq’s oil industry and the completion of the pipelines and terminals needed to export it are essential to the country’s economic recovery and territorial integrity.
Overhauls of Mexico’s long-troubled oil industry, now supported by two of its three major political parties, could be critical to its prosperity as a trade partner and its ability to foster growth and reduce the possibility of an insurgency on the U.S. borders.
Most forecasters, as well as the Organization of the Petroleum Exporting Countries, agree that the world will be using more oil in 2035 than it does today. So we will still live in a world where the price of oil matters. Oil will remain the dominant source of transportation fuel, remaining strategic for the global economy.
Next time won’t be different. The boom and bust cycle of oil prices will not be abolished. Spare capacity — the amount of additional oil that could be produced if needed — will probably continue to be a small fraction of total supply. The more modest global buffer stocks are, the greater the market’s anxiety over potential disruptions.
While China and India are considering increasing their own strategic reserves, the overall built-in cushion of supply around the world will probably remain thin. A single outage — from a country like Iran, Nigeria or Venezuela, or a nation that fails to meet hoped-for production targets, perhaps Brazil or Iraq — would push oil back onto the front page.
This means the United States will still care deeply about keeping sea lanes open for all forms of trade and about diversity of global energy supply. Washington will also want to encourage access to new exploration areas to ensure investment can produce the supply to meet growing demand.
The United States will still care about the fate of Arab societies, the stability of West Africa and the stable evolution of new producers in East Africa, the evolution of Venezuela and the need for multiple oil and gas pipelines to Europe to produce competitive prices there.
The oil boom will, or at least should, lead to changes in U.S. policy. The approach to strategic reserves and to the engagement of current and future producers should change.
With declining imports, the U.S. government will be in a position to respond more forcefully to supply disruptions by providing the global market with real barrels of oil. It will be able to respond more effectively if policy evolves to allow easier exports of S.P.R. oil through a market-savvy decision-making process.
It should assist others who want to develop their own resources — as the United States has through the shale gas and tight oil booms — by helping their governments put in place the fiscal, environmental and safety regimes necessary to facilitate the growth of robust domestic markets.
More production will help keep prices moderate and diversify supply.
Investors may not welcome moderate oil prices. But from a foreign policy perspective, increasing competition and reducing government take from oil is still the best way to constrain the worst tendencies of petro states.
U.S. self-sufficiency in natural gas has been a domestic bonanza. The country’s balance of trade has improved, gas is now competitive in price with coal, and despite the absence of a carbon price or cap, U.S. carbon dioxide emissions in the first quarter of 2012 fell to levels not seen since 1992, in large part due to the decline in coal-fired electricity generation as utilities substituted gas for coal.
Less costly gas is also reviving the U.S. petrochemicals industry at the expense of its European and other competitors.
If the United States becomes confident that the new supply is real and starts allowing exports of liquefied natural gas, it could help break the oil/gas price linkage that keeps gas prices high in Asia, which would help those countries thrive.
Asian L.N.G. prices remain stubbornly higher than European or U.S. prices, based on the premium governments in the region place on security of supply and the dominance of state-owned utilities as buyers.
U.S. L.N.G. exports could help provide competitively priced supplies that could be a major source of economic relief to the struggling Japanese and Indian economies, and help sustain the growth of China, Korea and Taiwan.
Such U.S. exports to the Western Hemisphere could help reduce Caribbean dependence on subsidized and high-carbon fuel oil supplies.
And L.N.G. sales to Europe could further erode that oil price linkage and give relief to a struggling euro zone.
If the technology and project management deployed in the Marcellus, Barnett and Eagle Ford shales can be even partially replicated in Eastern Europe, China and India, the world could see faster greenhouse gas reduction — through substituting gas for coal — at lower cost than any mechanism envisioned by our climate negotiators.
The big winners could be the new potential exporters — the United States, Canada and even Poland. Countries now heavily dependent on Russian gas — Bulgaria, Poland, Romania and Ukraine — might also benefit.
The big losers could be the current exporters at high prices — Russia and Qatar — as well as those who want to join that club — Iran and Venezuela. Lower prices, lower emissions, greater diversification, more competitive pricing. It’s a diplomatic royal flush.
Here again, the path to this potentially happy potential outcome lies in more engagement, not less, on investment climate, intellectual property protection and environmental best practices.
Within United States the debate must focus on whether the U.S. government will trust the market that brought these riches to also be the best mechanism to work out how to supply the domestic market and exports at the same time.
The U.S. and North American oil and gas booms are phenomenal economic windfalls. But security always trumps economics in U.S. foreign policy. The country’s commitment to global security and its vulnerability to global oil prices will keep Washington engaged for the foreseeable future.