Oil, whether we like it or not, still remains one of the biggest commodities driving the geo-political manoeuvring of nation states, specifically for the US, the lone hegemon. “The solution to climate change is called energy policy,” US secretary of state John Kerry said last year during a speech on climate change and national security. While it is true that the world is moving towards alternative energy sources faster than ever, hydrocarbons are expected to remain king for at least another three decades – that is a long time in politics.
As the heats of the upcoming US presidential elections come to a close, Republican candidate Donald Trump, better known for his outrageous statements than leadership qualities, said that the US “should have kept the oil” as part of its war-spoils from Iraq. “Keep the oil, keep the oil, keep the oil. Don’t let someone else get it,” he went on to say.
However, the critical role of oil in shaping US foreign policy over the past many decades has now drastically changed, altering the dynamics of the US’s international relations policies. In fact, many of the country’s policies of engagement and dialogue with its traditional foes such as Iran, Russia and Cuba are possible today because the US is close to achieving a significant milestone for its economy and national security – energy independence.
The advent of hydraulic fracturing technology, commonly known as ‘fracking’, which uses an injection of high-pressure fluids (often a combination of water and chemicals) to release oil and gas from crevasses of rock formations deep underground, has changed the landscape of American energy. From 2007 to 2012, shale oil saw a 18-fold increase in the production of light tight oil. Apart from the US, only a handful of other countries have commercially viable shale prospects, these are China, Argentina and Canada. The success of these countries, according to researchers Michael Zimmer and Elissa Welch of Ohio University, will also erase the US’s need to import liquefied natural gas (LNG) for the next 20 years (although, arguably, this is a short period of time as far as energy security is concerned).
Why the US leads shale gas production
The shale revolution in the US started in the 1970s, during what is known as the first ‘oil shock’ today – it was precipitated by an embargo by the Organisation of Arab Petroleum Exporting Countries, not to be confused with Vienna-based OPEC, in response to Washington’s involvement in the 1973 Arab-Israeli war. During this time when pumps in the US were going dry, the seeds of what was going to be the American shale revolution were planted via the Eastern Gas Shales Project in 1976 and the Federal Energy Regulation Commission (FERC) research budgets for the Gas Research Institute. But it was not until 1991, before the first shale drilling was done in northern Texas, and not before 1998 that the first ‘economic-scale fracture’ using technologies specifically developed for a domestic American shale boom was achieved.
While the US has embraced fracking, some countries have opposed it completely, including major economies in Europe – as the debate around environmental protection and climate change gains global traction. In June, Germany, Europe’s largest economy that had also decided to shun nuclear power, decided to ban fracking. Germany’s decision comes on back of its population’s ‘suspicion’ over the technology and its impact on the environment, specifically on drinking water resources. Others such as the UK have also scuttled progress on fracking on its mainland, with England banning fracking from 40% of its designated ‘shale’ areas and Scotland opting for a complete ban. Other European states such as France and Bulgaria have also banned fracking completely over environmental concerns.
The US still remains the only country that has a very successful shale economy because of a host of reasons. First and foremost, in the US, if a private landowner strikes oil on his plot, the natural resource belongs to that person and not the state. Secondly, abundance of other natural resources like water and land, abundantly available in the US, made it much more commercially viable. Third, the US administration provided many tax sops to both companies and land owners to develop and produce shale gas, giving a new lease of economic life to many US states such as North Dakota, Texas, Colorado, Wyoming, Alaska and so on. Shale gas also brought in new employment opportunities in these states, attracting labor from all over the country to be part of this lucrative new energy economy, the likes of which had not been seen since the coal boom of the 1980s. However, there have been pitfalls as well, with shale projects in the US being economically risky and small companies starting and collapsing at an unprecedented pace.
Beyond economics, environmental and health concerns are often grossly under-reported when it comes to the narrative of the success of the American shale industry. For example, the state of Wyoming saw a huge boom in shale gas that changed its economic fortunes. However, famous for its clean mountain air and pristine landscapes, Wyoming now had worse air quality than Los Angeles, due to shale gas extraction. This came to light when people living near the gas fields started complaining of shortness of breath and bloody noses due to increased ozone levels.
According to data obtained by Pro Publica, in North Dakota, one of America’s biggest beneficiaries of the shale boom, oil companies reported more than 1,000 oil leaks in 2011, with perhaps hundreds more going unreported. A 2011 journal article in the Human And Ecological Risk Assessment compiled a list of 632 chemicals used in fracking, finding that 75% of these chemicals had adverse effects on respiratory and gastrointestinal systems and sensory organs. Of the charted chemicals, 40-50% could negatively affect the brain, nervous system and the cardiovascular system. These are some of the grave underlying concerns that have been taken into consideration in places like Europe, but are often side-stepped in the US due to the strong and powerful lobbying groups.
Fast forward to the late-2000s and prices of oil were again in contention as they rocketed above $110 per barrel, largely not due to market economics of an internationally traded commodity, but because of geo-political tectonic shifts being caused by the US coming on board as one of the world’s largest producers of oil and gas along with being one of the largest consumers as well.
Today, at $50 per barrel, literally less than half during the 2013-14 peak, the price is seen as ‘stable’ even as analysts and pundits maintain that the markets remain grossly oversupplied. This is quite the departure from the ‘peak-oil’ debates we were having just a few years ago.
Re-carving global politics via US shale
Energy self-sufficiency for the US has huge implications for global geo-politics as well. One of the main reasons why oil prices were near $120 per barrel a few years ago – and then crashed to as low as $38 per barrel a few months ago – is the internal wrangling and political hide-and-seek being played between the OPEC’s member countries, as well as with its two prominent members and regional foes Saudi Arabia and Iran. Riyadh, a Washington ally, has insisted, along with others, on not cutting down production from its massive oil fields in order to protect its market share. This move, partly at least, is aimed to unsettle the American shale economy at Saudi’s own expense, with Saudi taking solid fiscal hits to its own economy. But questions remain over how long it can maintain this façade, as Washington affordably remains aloof towards many of its demands.
US President Barack Obama, whose administration rode into the White House on the back of strong domestic oil and natural gas production – partly thanks to the shale revolution – used this historical anomaly to re-calibrate America’s geo-political requirements. Historically, with America’s engagements in the Middle East, oil has played a crucial part not only for its own national interests, but also to deter this vital commodity to land in the wrong hands of both buyers and sellers. The fact that ISIS has used ‘blood oil’ from Syrian fields, where even India had invested, to fund its campaign of terror shows how the world’s most important commodity can reshape a region’s political and social economy drastically, and often, for the worst.
However, for Obama, the US’s rise as an energy power meant he could address some of the salient issues of American foreign policy and bilateral disengagement with more ease – interact with foes that didn’t need to be foes anymore. In 2012, Obama said that the US had begun to free itself from foreign oil and has since overseen an increase in oil output, a big change from the declining production during former US President George W. Bush’s reign.
This, of course, is ironical since Obama is seen more as a promoter of green energy than a friend of the oil and gas business (he cancelled the 1,897 km long Keystone XL oil pipeline between Canadian oil sands and the US Gulf coast citing climate change concerns). Nonetheless, as a tool, he has taken the rise in US shale in his stride for both economic and political gains even as analysts warn of strong decline in American shale in 2017. Daniel Yergin, known as the Yoda of the energy world and author of the acclaimed book The Quest, predicts that the rise of off-shore fields in the Gulf of Mexico could offset the US’s shale boom and plunge it into decline. Which in turn could “mitigate” the effect of market pessimism on oil prices, which has been magnified by the slowing down of China’s economy – no more 10% GDP growth in China that everyone had gotten used to. Beyond China, it is imperative to also remember that Iran’s might in the oil and gas sector hasn’t been tapped to its full potential yet as it will still take a few years before the country can apply the required technological upgrades needed to bring its derelict fields to modern operational standards, mostly to be done by the US and European contractors.
The US shale story is one of the premiere reasons why OPEC members have refused to cut back on production. OPEC, a cartel like organisation which is used to having its own way as far as control over global oil markets is concerned, is facing considerable push back from non-OPEC countries such as Russia, Mexico, US, Canada, Norway and others. More than 61% of the production of oil in the global markets today comes from non-OPEC members – a trend started by the 1970s oil glut to spread out the risk for importing countries and domestic producers as well. To put it in perspective, American imports of oil under Obama have dropped by a huge 60%. In 2008 the US imported 11.1 million barrels per day (bpd), in 2015 it was down to just 4.5 million bpd.
The advent of the US as an oil and gas power over the past few years is one of the big reasons why Obama was able to bring Iran, a pariah country to the US since the 1979 revolution, to the negotiating table over its nuclear programme. The same shale revolution also gave the US enough leverage to initiate crippling economic sanctions against Moscow after it annexed Crimea and initiated a proxy war in eastern Ukraine. While this decision went against many American oil and gas behemoths, such as ExxonMobil, that are active in Russia, it was offset by the fact that the US had some protection against global oil prices thanks to its domestic energy economy.
But, perhaps, one of the biggest examples of how US shale has caused turmoil within OPEC economies can today be seen in Venezuela. A member of OPEC and an oil economy which now stands on the banks of bankruptcy due to its intense state spending on social schemes to keep its population in check, rather than help their development, Venezuela is bogged down with massive inflation and food shortages due to the oil price crash, which was the Venezuelan government’s biggest and largely only source of income. Today, the country ruled by former president Hugo Chavez, who hated the US with all his might, now imports nearly 300,000 bpd of light crude from the US. These imports – deemed necessary due to Venezuela’s economic situation and the local hydrocarbon (largely heavy oil) development projects that are languishing as funding dries up – now play an active part in keeping the country afloat, while also giving Washington leverage over a regime which has been bred to be dead against it.
Obama did not orchestrate the US shale boom; he merely inherited an economic trend in the US, which was on autopilot. Others who benefited from this price collapse were of course the newly christened developing economies in Asia, who continue to reap the benefits. Even this works in the favour of US foreign policy, as it looks to hone Asian economies as sharp deterrents against a rising and erratic China.
However, in true Washington D.C. fashion, often strong lobbying groups scuttled his concerns with interests intertwined in the US Congress where the Republicans dominate the Senate and the House. In June, contrary to what happened in Germany the same month, a US court struck-down the President’s strong stance against fracking on government held land.
The importers club
India imports about 80% of its oil needs and more than 55% of its natural gas requirements. Along with South Korea, China and Japan, India still depends and will continue to depend on foreign oil. Both China and India are expected to see strong growth in their import numbers. According to the International Energy Agency (IEA), demand for oil in China will grow by 40% and in India by a whopping 55% from 2012 to 2035.
India pays a mammoth $120 – $130 billion per year to import oil, which saw a significant cut over the past two years thanks to the price crash. In 2015-16, its import bill halved to just about $64 billion – gaining unprecedented savings for the exchequer. Like Obama gained from shale while taking office in 2008, Indian Prime Minister Narendra Modi’s government walked into a crashing oil market when he won a landslide election in 2014, giving him a much heavier budget to deal with and the cash to launch various schemes and investment plans in the country.
Perhaps the time is also ripe for an all-importers answer to OPEC, where the likes of India, China, Japan and South Korea form a consortium to work on hydrocarbon related matters together. Of course, the relations between all these states are not ideal, however the common interest of both access and cost of imported hydrocarbons could create a certain degree of geo-political assimilation in the region. China’s interests in protecting its supplies are clear; its moves in the South China Sea are also partially to protect its interests situated in the shipping routes of the Malacca Strait. When it comes to the Middle East, China is building its first overseas military base in the tiny African nation of Djibouti from where it will be able to protect its oil interests travelling through the Persian Gulf (Beijing has already built its own airport in Iraq to ferry workers from the country’s southern oil fields).
This leaves the field ripe for greater Indo-US engagement in energy security and ‘strategic’ energy security, which overlaps with other areas such as common regional defence and deterrence goals.