While the entry of American energy resources from unconventional production will have some measurable effect on the global price regime, these new resources also provide an opportunity for struggling Western economies. The West may have a chance to rehabilitate its global economic leadership.
The massive gas reserves in North America are going to change the global energy regime. Maybe. The most startling element of the discovery was the reversal of fortune for the natural gas industry after its supposed peak in the early 2000s, when Alan Greenspan testified to both its future increasing cost in North America and its waning usefulness as a cost-effective energy source. Gas production was going to be an alternative, fringe energy source in North America, whereas today it can provide a welcome boost to stagnant Western economies. Herein lies the true nature of anything “revolutionary” in these newly accessible and truly massive natural gas discoveries. Should Washington deregulate the export of liquefied natural gas (LNG) and Europe decouple itself from Russia’s gas imports, Western nations might benefit from decades of uninterrupted distribution and revenue.
The mechanism that brought about the current gas boom is a function of high prices meeting new technologies. Extracting gas from shale formations was experimented with as early as the 1980s but perfected in the early 1990s. When prices rose after gas production reached its peak, so did motivation to apply these technologies. By 2010, shale gas accounted for 20% of U.S. gas production – a proportion not matched since 1970. The potential impact was immediately obvious: as a cleaner alternative to coal, carbon emissions from power generation would be slashed, and with an estimated production of 300 billion cubic feet per year, gas could reduce the need for imports.
Those with deeper memories have not yet pointed out that America had already been gripped by natural gas mania during the 1970s, when exploration revealed roughly two trillion barrels of crude oil trapped in similar shale rock formations in Canada and in America’s Midwest. At that time, the costs of petroleum were easily manipulated by a newly formed energy cartel: OPEC. Changes to price, infrastructure costs, and unproven extraction techniques could not overcome Congressional incentives. Companies bailed on projects.
There is reason to believe that this time will be different, owing mainly to innovative and cost-effective technology, and also to American domestic political will. The U.S. is still the world’s largest energy consumer, and demand is likely to rise as the U.S. pulls itself out of the 2008 recession. Increased gas production will be ready to contribute to the Obama administration’s initiatives to limit greenhouse gases. Prices will have to remain relatively high, and extraction costs must continually improve to ensure profitability of unconventional gas. At $9.97 per thousand cubic feet (as of November 2012) for residential customers, perhaps there is still a sizable margin away from the $6.00 to $8.00 breaking point for most energy companies.
The U.S. government could reduce the risk and the fluctuation in prices by incentivizing infrastructure projects to quickly bring gas to markets across the country. The costs of delay are already apparent, with large price differentiation ($15 per barrel) between both U.S. coasts. Opportunities from arbitrage are already causing shifts in infrastructure: retooling rail terminals and a proposed pipeline from Canada and the Dakotas to the East Coast. It is here that increasing supply meets lack of ability to export. The result looks like a win-win for America, which has a choice of steady reduction in domestic energy prices or increased export revenue. But the question of whether the U.S. can become a major LNG exporter is still mostly academic. A recent U.S. Department of Energy report is sanguine about America’s prospects, but “Peakists”, those who calculate the diminishing production of gas resources, suggest that the U.S. may not even have the requisite resources.
Regardless, oil and gas producers, who over the longer term are subject to price and profit, are eager to reach Europe, where prices are three to four times greater than those in the U.S. Enthusiasm is international. England, Spain, India, and South Korea are already building regasification terminals to welcome imports. The International Energy Agency forecast in November 2012 predicted that America could be the largest producer of gas by 2020, provide 11.1 billion barrels of unconventional energy by 2023, and be self-sufficient in energy by 2035. This must necessarily have some effect on imports, forecasted to plateau by 2022 at around 3.5 million barrels per day. Already, waning American demand is reducing purchases from West Africa and OPEC while opening resources for East Asia and Europe.
America’s portion of global supply will have an increasing effect on global distribution of energy as exporting nations find other destinations for their products. This is good news for importing nations, such as the U.K., which can now use supply-side pressure as leverage for better prices for long-term contracts. This could smooth out volatile costs of piped gas and allow other countries in Europe, which are reliant on capricious Russian gas supplies and spot prices for LNG, to diversify their supplies. Germany, for instance, is in the process of denuclearizing its energy infrastructure and will need alternatives to fulfill demand. The Netherlands, Lithuania, and Poland would also benefit from steadier energy supplies. Suppliers of LNG will have to adapt, and Asia appears to be the future destination of Russian gas.
Middle Eastern suppliers, whose societies are largely based on patronage, remain particularly vulnerable to any changes in their oil and gas revenues. The Arab Spring enlarged the domestic threat of instability, requiring additional spending to placate local grievances. Finding alternative buyers and maintaining market share, therefore, is a matter of national security as Arab governments embark on a period of social introspection.
Number crunching can only measure the potential economic gains of new petroleum resources whereas the social environment in which they arrive will determine the ramifications beyond monetary payoff. This is the subconscious source of so much enthusiasm for extracting these resources: the Western world sees a new opportunity to rebalance economic order from pivotal resource-rich regions of the globe – regions in which Europe and America typically expend time and resources sheltering from outside influence and internal instability.
As the source of this new wealth, America has the chance to lead ailing Western economies out of their current malaise by offering to reduce the cost of an increasingly costly component of domestic production – energy. At the moment, the onus is on American lawmakers, with influence on infrastructure spending. But should the U.S. government be compelled to focus its attention on this one issue (among others), the rewards may well be historical, ushering in a parenthesis of increased influence on world affairs. Power, as a calculation of military influence, is giving way to economic leverage in a world of complex interdependence. The present opportunities may allow America to silence Declinists (and other pessimists presaging the contraction of American preeminence) for the next few decades while bringing about a renewal of Western influence.
The key is timing. Completing projects to facilitate smooth transfer of resources to foreign markets while enthusiasm is high can allow importers to commit to diversifying their supply. Acting soon can also prevent OPEC from altering production to counter competition from other regions. These moments of fortuitous rebalancing – in this case economic – are a constant in world affairs and need to be properly capitalized on when they occur. Perhaps this particular moment will be filtered through realistic expectations, but this kind of missed opportunity is something the West cannot afford.
