Tuesday, November 19, 2013

Refuelling American power

Nov 18, 2013


The shale revolution could shatter predictions of America's demise as a superpower and impact geopolitical dynamics.

By Jonathan Eyal, Europe Correspondent

PREDICTIONS about the United States' inevitable decline as a superpower are banal - even senior American officials are preparing for a world in which Washington no longer acts as the ultimate arbiter.

But what if all such predictions are wrong? What if the US confounds its doomsayers by performing another economic revival miracle that again leaves all competitors trailing behind?
That's precisely what recent research by the International Energy Agency (IEA), the world's most respected energy body, now suggests. And the main drivers for this potentially astonishing transformation are two commodities whose value, price and impact otherwise remain highly controversial: shale oil and gas.

Established soon after the 1973 oil crisis, the IEA's remit is to plan responses to future disruptions in supplies of oil, as well as to act as an authoritative source of information on the energy sectors.

Crammed with statistics and industry-specific jargon of the "downstream-upstream" variety, the organisation's annual World Energy Outlook is usually read only by oilmen and financial analysts. This year, however, the IEA's report made a startling assessment which deserves a wider audience and more careful scrutiny.

The organisation predicted that, as early as the end of next year, the US will become the world's top oil-producing nation, largely due to hydraulic fracturing and horizontal drilling, two advanced techniques to extract energy resources locked up in shale rocks and other geological formations.

More importantly, the IEA predicts that this shale revolution alone will boost US manufacturing and jobs, reinforcing America's economic edge over both Asia and Europe at least until 2035. "We will see manufacturing industry in the US flourish. US companies will enjoy a competitive advantage and increase their market share in terms of exports," said the organisation's chief economist Fatih Birol, at the official launch of the report, which took place in London last week.

"By contrast, the European Union and Japan both see a strong decline in their export shares - a combined loss of around one-third of their current share," the IEA warned.

And, though no other major exporters were mentioned in this context, it is clear that China and India, to name just two of the other big energy-intensive consumers, will also suffer a loss of trade competitiveness.

Future energy trends

TO BE sure, predicting energy trends is notoriously difficult. For example, hardly anybody foresaw the revolution in oil and gas production created by fracking in shale. The IEA, like every forecaster who gets things wrong, has simply soldiered on.

Furthermore, some of the organisation's current energy forecasts look shaky. The IEA believes, for instance, that over the next two decades, worldwide demand for oil and gas will remain broadly the same despite great efforts to improve energy efficiency, and that the price of oil will stay constant at around 128 per barrel in today's US dollars, despite the fact that extraction costs are only US$80 in real terms. Why either of these trends should continue to defy the logic of a market economy is never convincingly explained.

A good case can also be made that, even if all the predictions are correct and shale gas ends up providing the US economy with a distinct advantage, this is still not a game-changer in geopolitical terms. The relative cost of energy is critical for the production of chemicals, aluminium, cement, iron and steel, paper, glass and refined oil products, all the ingredients that underpinned America's phenomenal growth during the 19th century.

Determinants of supremacy

NEVERTHELESS, these were not the economic pillars that sustained US supremacy during the 20th century; that was achieved with America's lead over automated industrial production, innovation and the electronic age, all sectors in which access to cheap energy is not as decisive an advantage. So, the argument goes, however plentiful or cheap, shale gas cannot be considered a disruptive technology on a par with, say, the Internet, in either sustaining or reviving US predominance.

Besides, according to the IEA projections America's age of plentiful, domestic shale energy is likely to be short-lived. "It will peak around 2020 and then it will plateau," said Ms Maria van der Hoeven, the IEA's executive director. The US media took this as its cue to covering the story: Shale's Effect On Oil Supply Is Forecast To Be Brief, is how the New York Times entitled its rather dismissive article on the IEA report.

But such headlines may end up being remembered as one of this century's biggest understatements. To start with, America's projected 20-years' respite from high energy prices is not something to be sniffed at; it can provide the critical time the US needs to invent and adopt new alternative energy technologies.

Impact on geopolitics

NOT having to import oil and gas also means that the US can pick and choose conflicts around the world it wishes to become involved in, and those it merely wants to contain or ignore. That should be the ultimate prerogative of a superpower, but it's not a luxury the US has experienced since World War II, partly because of the Cold War, but also because of its growing dependency on energy imports.

It does not follow that the US will abandon the Middle East, but it does mean that the US can handle the region more dispassionately, with more brain and less brawn. And that, too, will be a first for geopolitics.

Nor is the shale revolution confined to the US alone. Through either luck or fate, the two biggest former communist countries in Europe - Poland and Romania - also have the continent's biggest deposits of shale gas. Not all of it will be recoverable at the right price. But even if only a fraction is extracted, that could drastically reduce Europe's energy dependence on Russia, the country both Poland and Romania dread.

More tantalisingly still, Poland on the northern edge of the European continent and Romania on its southern edge could establish two new energy corridors, strengthening European security. The US cannot lead this process, but will be one of its chief strategic beneficiaries, since a more secure Europe is one that requires less US attention.

The loss of European markets will force Russia to start selling larger quantities of oil and gas to China, something the Russians have desperately sought to avoid, since they know that the sheer size and vitality of the Chinese economy will mean that Russia will be transformed into just another raw materials supplier dependent on Beijing's whims. But the Russians will no longer have much of an option, for they have to sell their energy resources to survive.

Military planners around the world will also note that, once the Americans no longer need to import oil or gas, the US Navy's interest in protecting the long tanker sea lanes through which much of the world's oil and liquefied natural gas currently moves may wane.

The US will continue to have a direct stake in the protection of the freedom of navigation. But its attention will not be on the specific requirements of protecting oil and gas supply routes, so other countries will have to take up this slack, or new, overland pipelines will become more important. Beijing already appears to have drawn that conclusion by following both options: It is expanding the reach of the Chinese navy, and has allocated a further US$40 billion (S$50 billion) specifically to oil and gas pipeline networks with Russia and Central Asia.

None of this guarantees that the US will reverse its current relative decline. Still, the combination of cheaper energy resources leading to higher competitiveness and a growth in America's share of global trade, coupled with the luxury of exercising more freedom on what military operations Washington chooses to become engaged in all suggest that such a revival is possible.

All that can be said at this stage is that every previous prediction of America's demise as a superpower - from the "confident" assessment during the 1960s that the Soviet Union would "bury" the US, to the forecast during the 1980s that Japan would do the same - was proven wrong.

And on each occasion, the key reason for such errors was that forecasters ignored a development already evident at that time and which had the potential to renew American power.

Just like the shale energy revolution today.

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