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New World Coming: America the Energy Superpower

New World Coming: America the Energy Superpower

Source: Business insider

The energy boom upends arguments about the inevitability of U.S. strategic decline

A previous post peered into the crystal ball to argue that America’s strategic prospects are dramatically brightening due to an unexpectedly improving energy outlook and the looming revitalization of its manufacturing base.  This thesis cuts against the reigning anxiety about the nation’s economic course as well as the torrent of prophesying about how China is poised to eat America’s lunch.*  A subsequent post extended this theme to suggest that among the foreign policy implications of the U.S. energy boom would be the denouement of Russia’s great power aspirations and the restoration of U.S. soft power.

In the few months since these two posts, other analysts have amplified these points and offered others worth pondering.  The present post focuses on the energy side of the story, while my next one will pick up the manufacturing side.

As a starting point, consider the sheer magnitude of the U.S. energy bonanza.  Over the last five years, there has been a marked surge in domestic oil and natural gas production, causing in turn a dramatic reduction in the level of oil imports.  According to the Wall Street Journal, the United States will cut its reliance on Middle Eastern oil in half by the end of this decade and could end it altogether by 2035.  Citigroup reports that for the first time since 1949, the U.S. has become a net exporter of petroleum products and has edged out Russia as the world’s largest refined petroleum exporter.  Some experts even predict that the country will become the world’s largest producer of oil and gas by 2020.

Just a few years ago, the fear was that America was quickly running out of domestic energy resources, but it now appears that it is sitting atop a staggering amount of natural gas, perhaps as much as a century’s worth supply.  The International Energy Agency speaks of the “Golden Age of Gas” and just last month natural gas supplanted coal as the largest source of U.S. power generation.  The new-found bounty is courtesy of key strides in extraction technology – namely, hydraulic fracturing (“fracking”) and horizontal drilling – as well as advances in seismic imagining that have unlocked gas and oil deposits previously thought inaccessible within tightly-packed shale rock formations.

A recent report by the Government Accountability Office concludes that oil deposits in the Green River Formation spanning parts of Colorado, Utah and Wyoming contain up to 3 trillion barrels of oil, half of which may be recoverable, which is about equal to the entire world’s proven oil reserves.  The Bakken shale bed in North Dakota has been a bonanza (here and here), turning the state into the nation’s second-largest oil producer after Texas.  The gas-rich Marcellus formation in the eastern U.S. has made Pennsylvania the site of the world’s second-largest gas field.  The Congressional Research Service reports that total U.S. energy reserves now exceed those of all other countries, including the Middle Eastern nations that have long been our oil overlords.

The energy boom promises far-reaching, even astounding, economic reverberations.  A new Bank of America Merrill Lynch study finds that the benefits are injecting as much as $1 billion a day into the U.S. economy and may be keeping the country out of another recession.  According to the IHS Cera research firm, some 600,000 new energy-related jobs have already been created since 2008.  The Citigroup study cited above predicts net job creation from 2.7 million to as high as 3.6 million across the entire economy by 2020 as manufacturers benefit from much lower energy costs.  It also foresees an increase in real GDP by an additional 2 to 3 percentage points and a 60-percent reduction in the current account deficit as oil imports fall and energy exports rise.

The political ramifications are equally profound.  As Walter Russell Mead sees it, growing prosperity in the American heartland will rework the domestic political landscape as the Middle West’s pragmatism reasserts itself and calms the nation’s roiling ideological divisions.   Building on this point, one might add that the region’s Jacksonian values, which look askance at ideology-based exertions abroad, will also have a major effect on the nation’s foreign policy debates.

Peering beyond the nation’s shores, the decades-long centrality of the Middle East to the global economy and the U.S. foreign policy agenda is set to fade in the years ahead.  A number of analysts (examples here and here) anticipate the irrelevance, if not outright collapse, of the OPEC oil cartel.  A former president of Shell USA predicts that “OPEC will descend into chaos as an organization.”  Another commentator foresees “the slow-motion collapse of the Middle Eastern oil empire,” an event that represents “a tectonic shift in the geopolitical balance of power, a strategically pivotal development only slightly less momentous than the fall of the Soviet Union.”  A third expert terms the waning U.S. reliance on the region’s oil “the energy equivalent of the Berlin Wall coming down.  Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.”

To be sure, Saudi Arabia’s pivotal capacity for swing oil production and the continued dependence of key U.S. allies (Europe, Japan and South Korea) and partners (India) on the region’s petroleum means that the United States cannot become entirely indifferent to the Persian Gulf’s security dynamics.  But the relative decline in strategic interest could enable Washington to move from its present role as an extra-regional hegemon to something like an off-shore balancer.  And having been freed from needing to deploy on a permanent basis significant naval and air power assets in the region, the U.S. would be able to augment even further its ongoing military buildup in East Asia, helping in turn to address concerns that America’s deep fiscal challenges undercut the Obama administration’s much-ballyhooed regional “pivot.”

If the prospect of the United States becoming a serious exporter of natural gas becomes real, then this too will shore up American influence in East Asia, especially with its Japanese and Korean allies.

The impact of these developments on China is a real wild card.  An ever-voracious appetite is behind a desperate scramble to gain access to energy resources in the Middle East, Africa and Latin America, which in turn fuels international suspicion regarding its strategic ambitions.  It is also driving increasingly belligerent behavior in the South China Sea.

Given that China possesses its own vast shale reserves, these troublesome external pursuits might tamper off in the years to come, raising in turn new possibilities for international collaboration.  Mead, for example, argues that:

On the whole, a world of energy abundance should be particularly good for U.S.-China relations. If both China and the United States have large energy reserves at home, and if new discoveries globally are making energy more abundant, there is less chance that China and the U.S. will compete for political influence in places like the Middle East.  More energy security at home may also lessen the political pressure inside China to build up its naval forces.

Oil may calm the troubled waters around China’s shores. The maritime disputes now causing trouble from Korea and Japan to Malaysia and the Philippines will be easier to manage if the potential undersea energy resources are seen as less vital to national economic security.

With both the U.S. and China more confident about their energy security, zero-sum thinking also could relinquish its hold on bilateral relations.  One expert sees a hint of this in Washington’s recent tolerance of Chinese investment in the U.S. energy sector compared to the political firestorm caused in 2005 when a state-run Chinese oil company tried to acquire Unocal, a California-based oil firm.

But these positive scenarios are contingent upon China being able to duplicate America’s energy renaissance.  There are strong reasons to question this assumption.  Despite increasing efforts to tie up with Western forms, its energy sector is dominated by lumbering state-run behemoths that cannot effectively utilize innovative drilling technologies or resolve the daunting problems caused by the country’s complex geology.  Some of its large shale beds also are in remote parts of the country that are not well connected with the burgeoning urban centers on its eastern coast.  And since fracking techniques require copious amounts of water, China’s serious deficiencies in water resources pose another constraint.  A recent Chinese government report acknowledged the “relatively poor” prospects for the development of shale gas.

If China cannot reap the benefits of the shale revolution, Beijing would then be faced with two contending strategic choices.  The first is to double-down on its aggressive external acquisition efforts while also beefing up its military and diplomatic presence in the Middle East and Africa even as the United States lessens its profile in these areas and sharpens its focus on China’s own region.  The need to expand the level of resources devoted far from home might not go down well with leaders still focused on domestic economic development.

Alternatively, Beijing could enter into a cooperative arrangement with Washington regarding large-scale delivery of U.S. natural gas.  This would be an unpalatable option for Chinese hawks since it grants strategic leverage to Washington.  One could expect nationalist tribunes to howl about granting the country’s chief rival a chokehold on China’s economy every bit as real as the Malacca Straits or how the United States instituted an oil embargo in an attempt to bring another rising Asian power – imperial Japan – to its knees in the mid-1930s.  From the U.S. perspective, however, this scenario would indeed have a moderating effect on Chinese strategic behavior as well as offering the diminution of bilateral zero-sum calculations noted above.

If America’s energy revolution comes anywhere close to matching its potential, the global leadership role it has played for the past seven decades will continue far into this century, upending in the process arguments about the inevitability of its strategic decline.  Working to reinforce this effect is the emerging revitalization of the country’s industrial capacity, a topic to which my next post will turn.

* My favorite prognostication is the argument that China’s economy would increase some 17-fold over the course of the next three decades, to reach a size of $123 trillion by 2040 and a command of 40 percent of global GDP.

This commentary was originally posted on Monsters Abroad.  I invite you to join me on Facebook and follow me on Twitter.

 

Author

David J. Karl

David J. Karl is president of the Asia Strategy Initiative, an analysis and advisory firm that has a particular focus on South Asia. He serves on the board of counselors of Young Professionals in Foreign Policy and previously on the Executive Committee of the Southern California chapter of TiE (formerly The Indus Entrepreneurs), the world's largest not-for-profit organization dedicated to promoting entrepreneurship.

David previously served as director of studies at the Pacific Council on International Policy, in charge of the Council’s think tank focused on foreign policy issues of special resonance to the U.S West Coast, and was project director of the Bi-national Task Force on Enhancing India-U.S. Cooperation in the Global Innovation Economy that was jointly organized by the Pacific Council and the Federation of Indian Chambers & Industry. He received his doctorate in international relations at the University of Southern California, writing his dissertation on the India-Pakistan strategic rivalry, and took his masters degree in international relations from the Johns Hopkins University School of Advanced International Studies.