Will shale gas have a role in foreign policy?

Moisés Naím / World Energy & Oil

What do the fall of the Shah of Iran, the collapse of the Soviet Union, the Internet, China’s economic ascent, Europe’s crash and the U.S. energy boom have in common?

No one saw them coming. All these events changed the world and no government, company or expert anticipated them or their many—and momentous—consequences.

With this sobering observation in mind, the only prudent prediction about the consequences of the United States’ energy boom isthat they are going to be as enormous and as surprising. Nonetheless, some repercussions of the U.S. energy resurgence are already evident.

Even if it never becomes a net exporter, the fact that the U.S., which is the world’s largest oil consumer (and until a few years ago, it’s top importer) is poised to become increasingly self-sufficient will create both new foreign policy options to its government as well as new sources of geopolitical instability.

WILL SHALE GAS EXTRACTED FROM THE U.S. MIDWEST CHANGE THE MIDDLE EAST?
The Middle East will be one of the firstregions directly affected by America’s new energy situation. While Saudi Arabia and other Middle East producers will continue to be important players in the global energy market, their dominance, enjoyed for most of the past century, will no longer be the central feature of this market. The implications of thistrend are enormous, ranging from the military to the commercial and perhaps even the social. As the supply of oil and gas coming from a variety of sources increases, prices will face downward pressures. Middle East producers are thuslikely to face dwindling export revenues, which will naturally constrain what they can do at home and abroad. Fiscal adjustment and other belt-tightening measures that have never been needed will become necessary. And, as we have seen everywhere else, governments forced to impose fiscal adjustment inevitably face popular discontent. Domestic political instability among Middle East oil exporters can in turn trigger changes in their foreign policies, which may in turn trigger changes in U.S. policy. It is unclear, for example, what belt-adjusting measures will do to the financial support that Arab oil exporters give to militant groups and allies in Pakistan, Afghanistan, Malaysia and other countries with large Muslim populations. Or the consequences for their behavior towardsregionalrivalslike Iran, a country poised to launch a major expansion of its own oil production if international sanctions are lifted.

As the geopolitics of energy change, so will the web of international alliances of oil-producing countries in the Middle East. For example, it’s distinctly possible that they may seek closer alliances with Russia and distance themselves from traditional allies like the United States. And a United States that is no longer critically dependent on energy imports from the Middle East will be able to recalibrate its role as the provider of the military umbrella that ensures the safe passage in the sea lanes through which middle eastern oil reaches global markets. Ensuring that the Suez Canal or the Strait of Ormuz are open and safe to pass will continue to be an American priority, although not as much as it was at the height of U.S. dependence on Middle Eastern oil. Analyst Nikolas K. Gvosdev argues that America’s newfound energy capacity means that “a robust U.S. military presence abroad will no longer be seen as essential for prosperity at home… the Carter Doctrine and the Reagan Corollary, which commit the United States to defend the countries of the Persian Gulf against outside aggression and internal subversion because thisregion and its energy resources are deemed invaluable to U.S. interests, [could] go the way of other now-irrelevant U.S. foreign policy doctrines.”

The consequences of the shale gas revolution on the Middle East are as varied and enormous as they are hard to anticipate with precision.

TOWARDS A NORTH AMERICAN ENERGY BLOCK?
Energy resources in North America are already massive and growing. The U.S., Canada and Mexico have about 1.8 trillion barrels of probable, recoverable oil reserves and 346 trillion cubic feet of proven gas reserves. Texas shale gas deposits are now known to extend into Mexico, which holds the world’s fourth largest reserves of shale gas. All this will naturally boost that country’s role as an energy player. These resources are complemented with significant coal reserves and a growing non-renewable energy inventory that is making North America essentially self-sufficient in energy.

The International Energy Agency, IEA, calls such gains “revolutionary.” According to their 2013 Medium Term Oil Marketreport, “The North American hydrocarbon revolution continues to dominate the supply outlook…. North American oil production will increase almost by 4 million barrels per day during the period 2013-2018, more than half of the increase predicted for non-OPEC countries.” In parallel, oil imports into North America will diminish from about 6 million barrels per day in 2012 to some 3.5 million barrels per day in 2018, while intracontinental oil and gas movements will intensify.

All this points to the consolidation of a self-contained North American Energy Block. This will have major geopolitical impact just by virtue of the block’s decreasing dependence on hydrocarbons imports. If the region becomes a net hydrocarbons exporter, the impact would be much greater.

These changes are bound to spark major revisions of the foreign policy of the United States. A prime candidate forsuch a revision is Mexico. U.S. policy towards its southern neighbor has always been driven by two key issues: immigration and drugs, and, to a lesser degree, trade (as a result of NAFTA, the free trade agreement between the U.S., Canada and Mexico). Moreover, Mexico’s planned reforms of its outdated energy policy suggest that the country can regain the energy lusterit has gradually lost in the last several decades. This, combined with the changes in the energy outlook of the U.S. and Canada, will create a very dynamic “energy zone” that gives Mexico a renewed importance in the calculations of U.S. foreign policy makers.

MORE ENERGY SECURITY FOR EUROPE
The cornerstone of the U.S. foreign policy regarding European energy security has been the promotion of gas pipelines from the Caspian and Central Asia regions to Europe, such as TANAP, TAP and Nabucco, in an effort to minimize European dependence on Russian gas. These efforts have been positive but, in the best of cases, expensive, time consuming and plagued by thorny political complications. Recently the U.S. 113th Congress has introduced bills aimed at facilitating access to U.S. liquefied natural gas (LNG) to all members of the North Atlantic Treaty Organization (NATO). The U.S. hope is that this move will give Europe a greater degree of energy security by undermining Russia’s energy choke on several European nations. In any case, the decrease in oil imports by the U.S. is already freeing significant volumes of hydrocarbonsthat are giving Europe more options than had only a few years ago.

ACCESS TO TECHNOLOGY AND THE U.S. DEALINGS WITH CHINA
Shale gas accounts for almost 40 percent of total natural gas production in the U.S. In China, which lacks leading edge technology, shale gas production represents less than 1 percent. But China holds the largest resources of shale gas in the planet, with estimated reserves of about 1,115 trillion cubic feet, almost twice as large as U.S.reserves. Speeding up the development of these resources is obviously a priority for China. Although American shale gas technology is not controlled by the government and Chinese energy producers can buy it directly from its private owners, the U.S. government is unlikely to be a passive observer of this technology transfer process. Access to U.S.-owned shale gas technology is bound to be a lever that Washington will use in its multiple interactions with Beijing.

IS SHALE GAS THE FINAL NAIL IN OPEC’S COFFIN?
The important cut in U.S. oil imports from OPEC countries will erode the geopolitical clout of the organization. OPEC oil that no longer goes to the U.S. would have to be marketed elsewhere, most likely in the spot market. The International Energy Agency estimates that global oil production capacity will grow to 102 million barrels a day by 2017, a volume well above demand forecasts of 95.7 million barrels a day. Such an excess production will tend to weaken oil prices in the medium term.

The cartel’s ability to affect prices had already been dwindling, as had its power to impose production discipline on its members—especially those whose economic needs make them hungry for additional oil revenues. For years, OPEC has not been high on the list of America’s diplomatic priorities. U.S. shale gas is likely to push OPEC even further down that list.

PROTESTS IN PRODUCER COUNTRIES?
Oil producing countries with large populations or poorly managed national finances are especially vulnerable to declining oil prices and loss of markets. Some of these countries, such as Iran, Iraq, Libya and Venezuela, require oil prices to be over $100 per barrel to satisfy theirfinancial needs. If prices fell below that level, they could experience significant political and social unrest. It’s quite possible that America’s. increasing energy self-sufficiency could trigger dangerous instability in these countries; the United States ignores this possibility at its own peril.

A MORE ASSERTIVE U.S. ROLE IN LATIN AMERICA
Years of deemphasizing diplomatic efforts toward Latin America have weakened U.S. presence in that region, a void that in some countries has been filled by populist, strident anti-American leaders and by an unprecedented presence of China. U.S. technology in shale gas development and non-renewable sources of energy can be instrumental in strengthening U.S. presence in countries such as Argentina, where significant shale gas resources exist, and in Central American and Caribbean nations that lack hydrocarbons resources. This has the potential to erode Venezuela’s (and, through it, Cuba’s) influence in those countries.

CONCLUSION
The U.S. energy boom will not only impact domestic political and economic conditions but will also change America’s foreign policy. In some of the areas, discussed here, the policy shift will be quite dramatic.While most of the impact is likely to be positive for the United States, the risks of increasing instability in some oil producing countries will also present unprecedented challenges to Washington.

Moreover, as shale gas exploration and production reach the substantial levels now predicted, it seems almost inevitable that conflicts related to its environmental impact or to its disruption of existing political equilibria will arise. It is impossible to anticipate the exact nature, location and timing of these conflicts. But what is safe to assume is that the shale gas revolution will spark surprising changes in the domestic politics and the international relations of many countries.