Instead of increased reliance on gas imports expected five years ago the US now has an abundance of cheap gas for domestic use, and is even projecting LNG exports. Reliance on oil imports has fallen from a peak of 60% (2005) to a current 45%; by 2040 it’s projected to be 37%. The most recent report of the US Energy Information Administration includes projections that shale gas will supply around half of US gas production by 2040. “Tight oil” will make up about one-third of its oil needs.
These resources are part of a broader category referred to as non-conventional petroleum (NCP) - a category Australia is embracing as well through coal seam gas mining and the Queensland Government’s very recent go-ahead for shale oil mining. The category includes both oil (deep-ocean, on-shore “tight oil”, “heavy oil”, oil from shale and from tar-sands) and gas (shale gas and coal bed methane, otherwise known as coal seam gas).
Technology - including horizontal drilling, sophisticated detection methods, hydraulic fracturing or “fracking” - has been cited as the basis for the supposed “game-changer” of the NCP boom. But at least as important has been the sustained three-fold increase in international oil prices since the early 2000s, and investors’ belief that this price will not soon revert to those earlier levels.
Any such energy-driven recovery could occur through regional investment multiplier effects, as well as cheap and plentiful gas to lure the return of energy-intensive industries.
Oil imports into the US may be reduced (with possible modest downward effects on international prices), but we could also see large US-bound revenues from its exports of liquefied natural gas (LNG). The latter would be in competition with growing LNG exports from rival suppliers. This includes Australia, which is now projected within a year or two to surpass Qatar as the world’s largest LNG exporter.
In oil markets there is essentially a single world price (correcting for transport costs, grades, sulphur content etc). But gas markets remain regionally segmented. This is reflected in the short term advantage from shale-influenced low gas prices in the US compared with much higher gas prices in the EU and East Asia, where, as a regionally tradable commodity, its price is linked to the high oil prices emerging since around 2004.
However, once the competitive effects of international LNG trade hit the US domestic market for gas, this locational advantage for gas-intensive industries will be eroded. Further, with technology transfer, major expansion of non-conventional gas may not long be confined to the US (and Australia). Similar gas resources are widespread internationally. China’s are estimated as at least comparable with the US, albeit with large technical and environment constraints. The impact of such constraints in the US is considered in the next part.
There is also growth in US export revenues from US coal. This is largely from reductions in US domestic use of high polluting and CO2-intensive coal in its own electricity generation sector, where it has been displaced by cleaner gas-fired capacity. Australia would be a major coal exporting rival, having long been globally about the largest exporter of both coking and steaming coal for electricity generation (but now rivalled by Indonesia), though very far from being the largest producer (which is China).
As already noted, the price of oil (as distinct from gas) is set globally. Further, as David Goldwyn has said:
Reduced oil imports would not provide immunity from supply disruptions. Indeed, as has been seen since the advent of the Arab Spring political upheaval, the effects of useful increases in US production can be overwhelmed by disruptions in producing countries.
Some analysts claim that the NCP boom can be a foundation for reasserting US global primacy. Indeed, a special policy unit has been set up in the State Department in support of enhancing US global energy strategy.
However, such a reassertion of US primacy would have to be within a system of world power that is no longer unipolar (1990, 2003) with the US as ‘global hegemon’. This multipolar trend reflects three factors:
- the “uneven development” implicit in the rise of China and other major G20 states
- the uneven contractionary effects of the GFC since 2008 (adversely affecting the EU and its unity in particular)
- the recent foreign policy mistakes of the US in the Middle East and West Asia.
These latter mistakes have been costly both in fiscal-economic terms and in terms of lost US international prestige. These mistakes in “grand strategy” were in large part bound up with misconceived oil policy, especially in the Middle East.
A US National Intelligence Council report claims that in a multipolar world “power will shift to networks and coalitions”. How this possible shift may impact on Australia’s status as another purported “energy super-power” will be considered in a later article.
If the US NCP boom sustains its macro-economic recovery at a faster rate than some of its rivals and allies, it will enhance US geopolitical power in general terms. But it is unlikely to be an imperial panacea claimed by some.
The NCP boom may also present more particular threats to powers viewed as US rivals or adversaries, notably some OPEC states and Russia, reducing their market power or political leverage.
Among the OPEC states, Iran is by far the major holder of natural gas reserves; it has the world’s second largest proven reserves after Russia. But economic sanctions on Iran, now considerably tightened as a result of US pressure, have precluded gas (and now oil) as a source of such export revenues.
Both China and India have a substantial need for diverse, secure and relatively low-cost supplies of natural gas. Enhanced gas supplies would reduce dependence on coal-fired electricity that threaten the planet’s climate stability, as well as dependence on nuclear power with its acknowledged hazards. Thus it is of global concern that Iranian gas exports are denied to these economies because of tight international sanctions promoted by the US.
As to Russia, expanding US exports of LNG to the EU will undercut its leverage as the EU’s major supplier of gas imported by pipeline. US LNG exports would also tend to reduce Russian export revenues, with an adverse impact on its economy. Hence, Russia is looking for new gas markets in East Asia. The US, in its “new great game” with Russia, to that extent has an interest in diversifying gas supplies to China and the rest of Asia.
In forthcoming articles, Barry will discuss US non-conventional petroleum’s environmental constraints and consequences, and consequences for Australian energy policy.