It’s like clockwork: When the race for the White House is on, the contestants will promise to make America self-sufficient in energy. Everyone understands this concept to mean less dependence on imported oil from the Middle East, though politicians do not always come out and say so. The implication is that if the US can break its supposed dependence, then it can disengage from (even forget about) a region that many Americans see as perennially volatile, if not hostile. In 2004, candidates George W. Bush and John Kerry each bewailed America’s reliance on “foreign” or “Mideast oil.” In 2008, Barack Obama vowed to kick the importing habit within ten years, to which the John McCain campaign replied with the one-upping catch phrase, “Drill, baby, drill.” The current mantra is “energy independence,” and in 2012 both President Barack Obama and Mitt Romney touted plans for achieving it. I asked Fareed Mohamedi, vice president for industry analysis at Statoil and frequent contributor to Middle East Report, for his thoughts on this campaign-season chestnut.
During the US presidential campaign, both candidates spoke enthusiastically of America’s coming “energy independence.” We’ve heard this pledge so many times before, from politicians of both parties. But recent articles in the Financial Times and elsewhere indicate that this time is different. Is the US poised to be “energy-independent”?
In reality, the issue of “energy independence” for the US was always a non-issue. Supposed dependence on the Middle East was a way for US politicians to justify attacks on Middle Eastern countries or provide phony explanations for why gasoline prices were rising.
First, even before the shale oil and gas revolution of which the Financial Times article speaks, the US was essentially self-sufficient in natural gas and coal, which accounted for a large percentage of its non-transport energy consumption. Second, while US imports of crude oil were growing before the shale oil revolution, mainly due to relatively low gasoline and diesel prices, these crude imports came from a large number of countries. Supplies from the Middle East were a smaller proportion than most people believe. Saudi Arabia was the number-two source of imports in 2011, but number one was Canada and the others in the top five were Mexico, Venezuela and Nigeria.
With the shale oil and gas revolution, North America could indeed become oil-independent and have a surplus of natural gas. Canada and Mexico are also part of this equation, along with the US. But the shale revolution has also transformed the US into a potential exporter of oil and gas, on top of being energy-independent. Crude oil exports from the US are banned, but US refineries have been buying cheaper US crude relative to the rest of the world (the unprecedented phenomenon of the WTI-Brent spread of around $20 per barrel), refining it in the US, and then exporting it as various highly profitable products.
As for the growing surplus in gas supplies, several changes are taking place. US utilities are switching from coal to natural gas, leading to greater US exports of coal especially to Europe. There is a lot of talk of a revival of US industrial investment to take advantage of very cheap natural gas prices in the US, and several US chemical companies that were going to expand overseas are now redeploying investments at home. Also, many companies want to expand the use of natural gas in trucking and car fleets. Finally, several oil and gas companies are planning on exporting natural gas in the form of liquified natural gas (LNG) to higher-priced markets like Europe and Asia. This has raised the possibility that the US may ban LNG exports so that prices stay low for US consumers and industrialists.
What is the larger significance of the technological advances in extracting oil and gas for the world economy?
The shale oil and gas revolution was not necessarily the result of a huge technological advance, but rather of incremental changes in technical innovation over the last several decades. What changed was the rise of oil prices in the 2000s and the perception in the market that they would be sustained at these levels. Higher oil prices led to three major changes in the world of oil: first, expensive drilling techniques like those used for shale oil and gas became economical; second, major resource-holding countries around the world hardened their terms; and as a consequence, third, small US independent oil and gas companies (as opposed to the super-majors like Exxon Mobil) sought new supplies in their own backyard that had now become profitable given the high prices. If this phenomenon of shale oil and gas spreads to other regions of the world (which is still highly uncertain because of some the unique conditions in the US), oil and gas prices could fall, giving the world economy a boost.
Long-time critics of dependency on fossil fuels, like Michael Klare, are now arguing that these advances promise only illusory “energy security,” both because of cost and because of unsustainable environmental side effects.
If you don’t like fossil fuels you are not going to like the shale oil and gas revolution in the US because there is just more fossil fuel around. But the abundance of natural gas and a switch over to gas from coal has led to a lowering of US greenhouse gas emissions. Moreover, if you want to use more renewables (notably wind and solar) in power generation, you need to use more natural gas to offset the fluctuation of those supplies. So more natural gas is a facilitator for renewables. It also is leading to lowering US dependency on gasoline and could accelerate electrification of the US transport fleet. Over 60 percent of Chinese energy consumption comes from coal. So a gas revolution in China like the US would have a massive impact on the environment and reduction of greenhouse gases.
The global north is again becoming a major producer of oil and gas, rather than just a consumer. How might this shift reverberate in global politics?
This is really a US phenomenon and I am not sure that it changes global politics. It could have an impact on oil and gas prices, which will possibly give a boost to the weak global economy. It could make Asia more dependent on sources of North American natural gas. But, all in all, it is possible that not much will change in the geopolitical arena.
How will this shift affect the strategic thinking of major non-Western producers, like Russia, Saudi Arabia and other Gulf states?
Saudi Arabia and the Gulf states were already focused on the rise of the Asian economies, which have been their biggest customers for nearly a decade. Short anecdote: Saudi Arabia’s biggest customer for crude oil is China. Saudi Aramco’s CEO reportedly goes to China nearly every other month and visits the US (the previous number-one client) only once a year. Whether this is true or not, the Gulf Arabs are giving Asia a lot more attention and creating a solid link between the western and eastern ends of the continent. That shift, however, does not change the role of the US in the Gulf — it will maintain the Fifth Fleet and other bases there as the guardians of oil export routes and deterrents to potential attacks on the region’s oil facilities. It is highly unlikely that the Chinese would want to assume this role, even if they could. Interestingly, the Indians are now cooperating with the US in patrolling the sea lanes.
As for Russia, it had largely concentrated over the last decade on “hard-wiring” itself with pipelines to “Old Europe” and promoting LNG extraction with the goal of exporting gas to the US. Moscow saw these projects as a way to revive its geopolitical fortunes. But two things happened: Europe went into a deep recession and gas demand fell; and the US remained self-sufficient in gas. So now Russia may have to start the process of reorienting itself to sell gas to China. The Chinese, however, are suspicious of the stability of Russian gas supplies. I think they will only become “hard-wired” to Russian gas when they have secured sufficient supplies of pipeline gas from Central Asia, LNG from Australia and the Middle East, and new supplies, possibly from the US and Canada. Then they can feel they have options in case of Russian interruptions.
The Carter Doctrine of 1980 enshrined the notion that it is a vital US interest to protect the Persian Gulf oil patch and the sea lanes that connect it to world markets. This idea has endured despite fluctuations in how much oil the US itself imports from the Gulf. Is there any reason to think that the US strategic interest in the Persian Gulf will wane?
No. Why would the US give up such a geostrategic asset when its potential geopolitical rival, China, is so dependent on the Gulf for crude oil supplies?