The US energy independence debate is getting very tetchy of late. Seasoned energy experts are trading cheap blows, principally for sitting on opposite sides of the fence. Nobody doubts that US energy will? keep growing, but whether it ever amounts to full ?independence? is at best tenuous. More importantly, it spells total disaster for America?s role in the world.?No global oil role, forget being a global hyper power. Those days will be gone.? ?
The allure of energy independence is a compelling story to tell. The US can shut up shop, source all its energy from home shores, never having to step foot outside the Americas to get its energy fix. The US will supposedly be able to boast 15 million barrels a day of liquids by 2020 from a raft of shale oil plays, with massive new oil plays feeding in from Canada in the North, inching production up to around 22mb/d. Unconventional resources are expected to explode from Latin America in the South. Brazil, Argentina, Venezuela will all see rapid supply growth, with Mexico having nothing short of a second energy revolution. Boil the numbers down, the Americas sits on 6.4 trillion unconventional barrels vs. 1.2 trillion conventional barrels across the Middle East. The US will not only be the world?s largest single producer of crude; oil will flow from North to South across the America?s, not East to West across the globe. America can declare total energy independence, import dependency (already clipped to 45%) will be banished; the deficit will be fixed. Oil receipts will replenish the Federal Reserve, not OPEC states. Millions of hydrocarbon jobs will be created in the US to boot. American oil, for American consumers, at American (WTI) prices. Whatever?s left over could be the swing supply for the rest of world, dictating how much everyone pays for a barrel of oil. Epic stuff, no doubt.
Whether you believe all these numbers doesn?t really matter. Few US politicians (or analysts) pay much regard to depletion rates, cost uncertainties for viable extraction, local environmental risks, or contrasting production priorities across the Americas, not to mention the small fact that Asian NOCs have been making some of the main investments across North America. The fact that oil and gas only accounts for 1% of US GDP, is also rather conveniently overlooked. Energy independence is already being touted as a self-fulfilling prophecy playing out in real time today, not as a gradual process of increments and change. This not only flies in the face of global hydrocarbon fundamentals that will see OPEC market share become more concentrated than ever over the next decade, (50% or more), it?s already creating serious geopolitical gaps across international energy markets.
That?s deeply problematic, precisely because supply side dynamics are looking more fragile than they have for a very long time. America has not only gone ?missing in action? to underwrite global supplies, it?s contributing to the international malaise by putting perceived political interests ahead of global oil stability. This comes in two forms, ?passive? and ?aggressive? from Washington ? both built on the single idea that the US can play a new geopolitical game thanks to energy independence beckoning just around the corner.
Independence: Passive And Active
Passive = Libya, where the US made it abundantly clear to Europe that Tripoli was not considered a vital national security interest for the US, despite prices hitting $127/b. Britain and France were left ?picking up the pieces, with US firepower providing back-up support, rather than frontline artillery. The chances of that happening had the US not struck oil would have been unthinkable in the 2000s. Conversely, aggressive = Iran. The US has decided that chimerical nuclear containment is a higher priority than collateral impacts Iranian sanctions have had on global oil markets. The conclusions are now chillingly clear. The US will increasingly only act in its own perceived national security interests. As long as those interests went hand in hand with safeguarding international oil supplies, consumer state could all rest easy. But US energy independence has torn up the script: We?ve entered a brave new world where Washington is not only unwilling to cover supply gaps through military / political action (Libya), and if needs be, is willing to put narrow interests above and beyond oil market stability (Iran).
No one should blame, or bemoan the US for doing this. It?s entirely up to the US whichever path they chose to take. You could even argue it?s exactly what Washington should be doing to create serious foreign policy optionality: pick and choose whatever it does where, when, and how for the rest of the world to fall back on. All fair enough, but the downside risk this presents to Washington has already been captured in the ?Kuwait Question?: Would the US take assertive action to secure some of the key producer states of the world, or would they now turn the cheek? We all know the US is no longer dependent on Middle East supplies; it hasn?t been for a long time given it sources less than 15% of its oil from the sand. But we also know that the decision to underwrite MENA supplies is nothing to do with US consumption ? and everything to do with retaining a dominant global geopolitical role. Ensure that hydrocarbons globally flow to the East and West, and much else follows as the geo-economic and geo-political lynchpin of the world. Lose it, and you?ll be geopolitically downgraded quicker than credit analysts can get stuck into Greek debt. That?s before we consider where Gulf States decide to recycle their petrodollars in future. No security, no $? It?s certainly a question for the US to ponder ? not only in terms of who they are going to sell their Treasuries to, but what currency oil is priced in. Hence the bottom line for the US; Middle East energy isn?t about oil for America, it?s ultimately about power. If the US wasn?t part of the Gulf energy game, it would hold zero sway with Saudi, no powers of persuasion over Iranian nukes, no say in the Arab Awakening, or how Gulf Monarchies handle critical succession problems in future. Let alone shaping vested interests to promote and extend US influence across the globe.
American Credibility Gone?
The problem for America is that doubts over US credibility are already creeping in from the energy independence hype. No one expects the US to step back into Iraq to shore up supplies if things take a serious turn for the worse; nobody expects the US to provide any serious state building measures in Sudan. Likewise strategic US interests in Central Asia now have more to do with American concerns over South Asia, rather than hydrocarbon provision. If Russia decided to re-exert its regional dominance over the Caucasus (circa 2008) the US would be highly unlikely to take any assertive measures to the contrary. Such out-posts are seen as ?nice to have? assets for US geopolitical standing, not as crucial global oil interests for America to underwrite and secure. Under a ?business as usual? scenario, these gaps are only going to get wider from hereon in.
Logic therefore dictates that consumers need a US plan B, and fast. The good news is that China already has one. It?s expanding its international energy footprint in the Middle East, Africa, Russia, Central Asia, and Asia-Pacific, reaching as far as the Americas and UK North Sea to secure its energy needs, (and hedge price risk more effectively through equity stakes). As the second largest consumer of oil, and one of the most import dependent states, Beijing is well aware that it has to ensure its own security of supply over the next decade as the US winds down its hydrocarbon presence. China will become the number one geopolitical force in the world over the next twenty years, and will do so for one, very simple reason: securing global hydrocarbon supplies. Europe has been very slow to appreciate this, but is finally cottoning onto the idea that it?s useless merely talking to prospective suppliers adjacent to its borders. It needs to work hand in hand with consumers at the other end of the Eurasian pipeline ? namely China ? to ensure its own security of supply. As Beijing plays a more prominent energy role, European energy security will depend on its ability to exploit Chinese influence in Central Asia as a mutual ?Beijing-Brussels? hedge against Russia, while working towards a consumer driven market to enhance supplies from the Middle East & North Africa. Europe is far better served taking the scraps from China?s energy table rather than wishful thinking that the trans-Atlantic ?energy relationship? still holds good. Like it or not, the logical conclusion of US energy independence is fundamental demand side realignment where new players fill new geopolitical gaps.
Careful What You Wish For
The snag is that while the US is very happy to extol the virtues of energy independence, it hasn?t come close to accepting the downside geopolitical implications that holds. Instead of working out an orderly division of (G2) hydrocarbon labour with China in the Middle East as the key producing region of the world, Washington is doing all it can to contain the rise of China, and doing so in Asia-Pacific. No doubt some of the local markets welcome ongoing US presence (especially around the India Ocean), but ?hard balancing? between the US and China in South Asia is a battle that America will only ever lose. Rather than sticking more fingers in the Asia-Pacific dyke, Washington would actually be better served keeping an eye on its own backyard. Argentina, Venezuela, Brazil and most notably Canada are doing all they can to diversify their export mix away from a saturated US market. They all know relying on a single source of supply and single source of demand isn?t smart economics. They?re all looking to load tankers to sell oil and gas onto global markets, and especially in Asia where premium prices rest. If we take forecasts for the Americas seriously, the US will not only lose global sway as the independence bug bites, it might also struggle to retain a dominant role in its own neighbourhood. Brazil could well end up joining OPEC as its production grows, Canada will play hardball with the US over its Arctic assets (not to mention plugging any new tar plays into Asia) and even when Chavez eventually conks out, don?t expect his successor(s) to be any more pro-American than then Kirchner clan in Argentina. New found petro-states will not be traditional US silos. America could very easily slip down the global league of geopolitical energy heavyweights.
Some will say humbug. The background pieces are falling into place for a ?grand bargain? to be struck between the US and China by trading mutual assets in the East and West. Make things simple and split the world in two, using the mid-Atlantic ridge as a proxy border. Beijing will concede all its assets across the Americas with West Africa put into the mix. In return, the US would cede the Middle East, Caspian, East Africa and Australasia as a pure play Chinese energy concern. Obviously things are never going to be quite that clear cut, but it?s probably a better bet than the current collision course we?re on between the US and China. If the US keeps preaching its energy independence gospel, all while containing the rise of China, the day will eventually come when China presents itself as a geopolitical fait accompli against Washington, not just across Asia-Pacific, but the Middle East as well. Rather than letting things get that far, the US would be far better served by following through on its own energy independence mantra: step back from the geopolitical ?frontline?, and use its new found resources to let China play a more prominent hydrocarbon role. That?s not just to defuse geopolitical bombs ticking between the US and China, but to make sure China can take up some of the US slack. If those gaps aren?t properly filled, everyone, including the US, will suffer.
It?s either that, or America knocks the energy independence narrative on the head, assures (and re-assures) other consumers that Washington will not only work to keep energy as a fungible, free flowing commodity, ?but that it remains the ultimate geopolitical backstop to oil supplies in the most producing regions in the world. That would give America ongoing leverage over the international status of the dollar, and indeed geopolitical red lines that emerging markets can and can?t cross. But keep spinning the US energy independence yarn (with associated passive and active political practice), then expect to lose global status as the geopolitical lynchpin of the hydrocarbon world. That would be a crying shame for America, not least because ?total? energy independence is a myth, especially in the form US politicians (and over excited analysts) are currently peddling. America will sacrifice its global geopolitical role on a hollow dream; energy independence, far from a dream, will become a living nightmare for America?s role in the world. US politicians should think long and hard about that part of the debate, or spend an eternity regretting their global fall from grace.
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