November 26, 2012

US energy: What's oil production got to do with national security?

The American energy revolution is starting to come into focus. Technological breakthroughs in shale gas and tight oil production are poised to make the United States — not Saudi Arabia — the world’s largest producer of crude oil as early as the end of the decade, according to the latest World Energy Outlook published by the International Energy Agency (IEA). The IEA’s analysis found that the United States could even be a net exporter of oil by 2035, a position the United States has not been in since the 1940s, when it had one of the world’s few developed oil industries.

At the same time, U.S. demand for crude oil is in decline and its crude oil imports are shrinking. Higher fuel efficiency standards in U.S. vehicles have contributed largely to depressed demand, with U.S. oil imports falling from 56 percent of total consumption to 46 percent between 2008 and the end of 2011, according to the U.S. Energy Information Agency. By 2035, the United States could be importing less than 2 million barrels a day, down from more than 8 million barrels today, according to the IEA.

The changing energy landscape is sure to pay dividends to the American economy. Increased domestic oil production could make a dent in the $460 billion a year U.S. consumers spend on foreign oil, shrinking the current account deficit and strengthening the dollar. At the same time, a glut in shale gas has contributed to cheap natural gas prices that are lowering energy bills for American businesses. Cheap electricity prices and more affordable petrochemicals that are derived from natural gas are together paving the way for re-shoring of some manufacturing jobs that moved abroad when trends were reversed.

But unlike the economic opportunities that are already manifesting, not much has been said yet about the national security and foreign policy implications of the American energy boom. 

Part of the challenge comes from the fact that it is hard to assess the security implications when the future is anything but certain. Indeed, like with all forecasts, national security planners are right to view the IEA’s future scenarios with some skepticism, as it is difficult to project as far forward as 2035 with any meaningful amount of certainty. For example, some of the tight oil projects in the United States may depend on a global price of $70 a barrel in order to remain economically viable. Some analysts are projecting prices to fall as low as $50 a barrel, which could drive investors away from investing in projects that require $70 a barrel to break even, upsetting some of the oil production estimates.

Nevertheless, national security and foreign policy planners can make some reasonable assumptions about what the American energy revolution could mean for U.S. interests. If I was a national security planner, here’s how I would view America’s energy boom:

The U.S. Will Continue to Have a Stake in the Middle East

Despite the insistence by some that shale gas and tight oil production will usher America to energy independence, that goal remains elusive. Oil is perhaps the most fungible globally traded commodity, with the price per barrel set globally. It doesn’t matter if oil is produced in the United States or Saudi Arabia, consumers will generally pay the same price. Of course, there is a widening price gap between West Texas Intermediate and Brent crude oil – oil produced in Texas versus the European Atlantic – which onlookers should continue to watch. Nevertheless, despite the price gap, a geopolitical crisis in the Persian Gulf, Nigeria or elsewhere would affect global supply, and both WTI and Brent crude oil prices would be affected. The bottom line: U.S. oil prices still depend on what happens abroad. The United States will still have equity in the Middle East and an interest in preventing the kinds of geopolitical crises that can drive up global oil prices, which have implications for the United States and its allies.

Moreover, the U.S. energy boom could contribute to some longer term instability in the region’s traditional petroleum producing countries, and U.S. policymakers will need to remain watchful.

Although the IEA expects global oil prices to stay above $100 a barrel for the foreseeable future, it is not inconceivable for the opposite to come true. One can imagine a scenario where oil prices fall to $60 or $70 a barrel due to much greater tight oil production in America.  At those prices, some of the petro monarchies – from Saudi Arabia to Kuwait – would be in a pinch to raise the revenue needed to pay for social programs, like fuel subsidies. If those governments are forced to curb social spending, it could exacerbate some of the socioeconomic and political tensions that have contributed to revolutionary change across the Arab world recently.

Energy Trade Will Undergo a Fundamental Change in its Role in U.S. Foreign Policy

Energy trade has long been an element of U.S. foreign policy. One needs to only look to the Middle East, where cheap conventional oil from Saudi Arabia and elsewhere has been the cornerstone of America’s relationship with major oil producers in the region. But energy’s role in foreign policy will change as the United States becomes a major trader in oil and natural gas.

Perhaps the biggest opportunity will come from liquefied natural gas (LNG) exports, which could strengthen U.S. relationships with major energy consumers in East Asia. For example, as Japan moves away from nuclear power and increases its share of imports of oil and gas from the Persian Gulf, there is an opportunity for the United States to strengthen its strategic partnership with Japan by trading LNG. The caveat is that the United States needs to develop the physical infrastructure to export LNG, and amend the laws that only allow for LNG exports to free trade partners unless the Department of Energy approves an export license, which is done on a case-by-case basis.

Energy trade could also be the most significant opportunity to foster greater cooperation with China. China shares many of the same energy vulnerabilities as the United States, particularly with respect to crude oil imports from the Middle East and North Africa. The United States could potentially become a reliable trader of LNG and, perhaps one day, oil, helping Beijing offset its strategic vulnerability in places like the Strait of Malacca. Such opportunities could fundamentally transform the U.S.-China relationship, and for the better.

The Shale Gas and Tight Oil Boom Will Make it More Difficult to Address Global Climate Change

The market may be pushing countries to double down on fossil fuels, making it more difficult to reduce global greenhouse gas emissions. The shale gas and tight oil boom is unlikely to stay isolated in the United States either. The market is calling, and the proliferation of the tools, techniques and infrastructure to produce shale gas and tight oil from Eastern Europe to East Asia will soon follow, along with the climate consequences.

The IEA concluded in its World Energy Outlook that unless there is a global effort to reduce greenhouse gas emissions soon, the existing energy infrastructure will lock-in 2⁰C by 2017; that’s the tipping point beyond which scientists project an increased frequency and severity of climate-related natural disasters, from hurricanes and typhoons to wildfires and drought.

While increased natural gas production could displace coal as the dominant feedstock in electricity generation in the United States and elsewhere, helping slow growth in carbon emissions, cheap natural gas prices may make it more difficult for cleaner, renewable energy production to compete in the market, nullifying the climate benefits that could accrue from natural gas. The New York Times reported in October that a Wisconsin nuclear power station may have been the first nuclear power station to be taken down by cheap electricity prices depressed by America’s natural gas glut. It could be a harbinger of things to come for the renewable energy sector, and may have a cascading affect on the ability for countries to reduce greenhouse gas emissions.

The global energy map is still unsettled, and there is a lot of uncertainty to be sure. But the security and foreign policy consequences are starting to take shape. It’s time to start planning accordingly.