Most of us are not likely to get excited about the prospect, still somewhat distant, of a more integrated global gas market. Consumers, however, should have a clear preference for such an outcome—for natural gas, in short, to become more like oil. For starters, a larger LNG market, where a significant portion of the market operates under new, more flexible terms with more players, will lead to more efficient allocation of investment resources. Moreover, increased LNG trade and more fluid LNG markets will smooth peaks and troughs in prices, helping ensure more stability, which is in the interests of both consumers and producers.
The Geopolitical Upshot
All of the innovations and developments described in this chapter add up to one big takeaway: natural gas will in many instances be a less effective political instrument than it has been in the past. In loosening the once tight relationship between many producers and consumers, the new geopolitics of natural gas favors the consumer over the producer and the market over political machinations. An expensive pipeline, undergirded by a long-term contract, where the price is linked to oil and restrictions exist on resale, no longer necessarily binds the producer and consumer together irrevocably. The consumer can now have many partners, seeking out deals in its best commercial interest and meeting its demand more effectively.
Inevitably, these new natural gas realities are changing geopolitics—the subject to which the rest of this book now turns. In the United States, the shale gas boom and the imminent shift from being a net importer to a net exporter of natural gas brings America both hard and soft power opportunites. In addition, in Europe, these energy dynamics, combined with new policies and political commitment, have created challenges for Russia and reinforced that country’s desire to “turn east.” China, however, no longer needs to tether itself to Russia in the interest of gaining access to sufficient natural gas resources. While Beijing will certainly seek Russian natural gas, the surfeit of potential suppliers is one important factor that has given it the upper hand in negotiations with Moscow over pipeline projects. China will want Russian piped gas, given its preference for overland routes, but the success of such projects no longer constitutes a top strategic priority for Beijing.
SECTION TWO
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The American Phenomenon
FOUR
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America’s Unrequited Love
Don Steinberg was enjoying a rare quiet moment in his office on the sixth floor of the U.S. State Department. No stranger to conflict, Don had served as U.S. ambassador to Angola in the 1990s and later as special coordinator for Haiti and the president’s special representative for the removal of land mines. Now it was November 2001, just weeks after the devastating blows of September 11, and Don was facing a different sort of challenge. As deputy head of Policy Planning, the office I had just joined, he was charged with providing assessments and foreign policy advice to Secretary of State Colin Powell.
Don was a thoughtful and approachable man, and I hoped he wouldn’t mind the interruption, even if it was to ask what seemed like a much too elementary question given all else going on in the department at that moment. Like many Americans committing to public service, I was determined to be useful and to make a difference. Having spent several years at the Brookings Institution, a Washington think tank, writing books and articles on foreign policy, I had plenty of ideas about how policymakers might do things differently. But turning an idea into an action? That, I realized, was the ultimate mission and one for which I had little or no previous experience. So I turned to Don and asked, “How do we get things done here?”
As I remember, he gave me lots of great counsel in response, explaining the wiles needed to navigate the “interagency process” and other bureaucratic mysteries. But one piece of advice stuck with me: the only way to be absolutely certain a policy will be implemented is to get it mentioned in a presidential speech, or better yet, the State of the Union Address.
I took this guidance to heart, and much later—in the wake of the Iraq War—it shaped my policy pursuits. However, I was—as I am sure Don was—aware that at least in one very important domain, getting the president to commit to solving a problem in his annual speech to Congress and the nation did not ensure progress or even action: energy independence. For decades presidential speeches had been littered with solemn pledges and dramatic undertakings to eliminate America’s dependence on foreign oil. But this goal remained elusive—until the recent energy boom in the United States. Suddenly, and unexpectedly, the prospect of achieving energy independence became real.
After decades of the pursuit of this status, one would expect the execution of the seduction to be more thoughtful. Instead, popular discourse and policy conversations are still littered with misconceptions and unrealistic or undesirable goals surrounding the concept. Moreover, many U.S. policies actually undermine the possibility of realizing the most sensible and attainable version of energy independence, which is a continental approach in conjunction with Canada and Mexico. In some circumstances, rather than aggressively pursuing the goal they claim to espouse, policymakers are thwarting America’s own economic and geopolitical advantages by making North American energy independence hard to realize.
Decades of Elusiveness
Speaking as a candidate in May 2016, Donald Trump called for “complete energy independence”; only two months into his presidency, he penned an executive order titled “Promoting Energy Independence and Economic Growth.” In 2010, President Barack Obama exhorted “this generation to embark on a national mission to unleash America’s innovation and seize control of our own destiny” by ending dependence on oil; his predecessor, George W. Bush, urged steps to “make our dependence on Middle Eastern energy a thing of the past.” Earlier presidents had been similarly preoccupied with this objective. In 1988, Vice President George H. W. Bush asserted that there is “no security for the United States in further dependence on foreign oil,” while President Jimmy Carter deplored “this intolerable dependence on foreign oil” in 1979. Just four years earlier in 1975, President Gerald Ford had announced new energy programs “to achieve the independence we want by 1985.” In 1973, his predecessor, Richard Nixon, had declared “Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy sources.”
There may be no other single issue that recent American presidents have so uniformly vowed to tackle, regardless of political party. Beginning in 1971, when U.S. oil production began to decline, every president has perceived the county’s ever-growing dependence on foreign energy sources to be a major U.S. strategic vulnerability. Americans—not just their presidents—longed to be insulated from the threat of another energy embargo such as the one suffered when the Arab members of OPEC stopped exporting oil to the United States in 1973. In the 2000s, concerns arose that the United States would replicate its reliance on foreign oil with a similar dependence on natural gas.
Economists also have been quick to note how damaging energy price spikes have been to the American economy. Of the ten U.S. recessions before 2005, nine were preceded by substantial increases in oil prices. Although economists disagree on the accuracy of the models used to estimate the effect of oil prices on GDP growth, the more conservative economists suggest that the price spikes of 1979 and 2007 each cost the U.S. economy somewhat less than 1 percent of GDP—or $150 billion if a similar shock were to have happened in 2016. Insulating the country from these price spikes—whether resulting from supply disruptions, speculation, or changes in expectations regarding the future energy supply-demand balance—would remove an enormous risk to economic growth and prosperity.
The geopolitical downsides of this strategic vulnerability have been widely noted as well. Secretary of State Condoleezza Rice voiced the frustration
of many when in 2006 she told Congress, “We do have to do something about the energy problem. I can tell you that nothing has really taken me aback more, as Secretary of State, than the way that the politics of energy is . . . ‘warping’ diplomacy around the world. It has given extraordinary power to some states that are using that power in not very good ways for the international system, states that would otherwise have very little power.” That same year, New York Times columnist Tom Friedman captured the discomfort of many when he lamented how the rising price of oil enabled authoritarian leaders to get the world “to look the other way at genocide, or ignore an Iranian leader who says from one side of his mouth that the Holocaust is a myth and from the other that Iran would never dream of developing nuclear weapons, or to indulge a buffoon like Chávez, who uses Venezuela’s oil riches to try to sway democratic elections in Latin America and promote an economic populism that will eventually lead his country into a ditch.”
Despite such concerns, American progress in paring back its dependence on foreign oil was fleeting in the thirty-five or so years after the Arab oil embargo in 1973. The Energy Policy and Conservation Act of 1975 introduced fuel economy standards and energy conservation programs. It also sought to increase domestic coal production and gave the government the authority to order power plants to burn coal instead of natural gas or oil—the very opposite of what is happening today! Tax incentives for the augmented production of other fossil fuels—and renewable energies as well—were increased substantially. In line with other developed economies, the U.S. government established the Strategic Petroleum Reserve to reduce vulnerability to supply shocks.
These measures paid off temporarily. U.S. net imports of crude oil from 1977 to 1985 fell nearly in half and American dependence on foreign oil dipped to about a quarter of total petroleum consumption. But such policies could not keep up with economic growth and declining U.S. oil production. Earlier gains were overwhelmed over the course of the next decade. By 2007, American imports of oil were a staggering 12 mnb/d—significantly more than the entire daily output of Saudi Arabia and nearly three times what they had been in 1985. Nearly two-thirds of America’s daily oil consumption of oil was met by imports from foreign countries. The notion of U.S. energy independence had become more fantasy than reality.
By this time, the obsession with America’s energy exposure went well beyond the corridors of the White House. At the end of 2006, more than a dozen senior American business executives and retired military officers banded together to put pressure on the U.S. government to do more to tackle the country’s vulnerability. Co-led by FedEx chairman Frederick W. Smith and former Marine Corps commandant P. X. Kelley, this group formed the Energy Security Leadership Council and launched an intense effort to get their message out through television and print ad campaigns as well as lobbying Congress and the White House. Around the same time, as U.S. and Iraqi casualties in Iraq were skyrocketing, political consultant James Carville conducted a survey on the national security priorities of voters. “Reducing dependence on foreign oil” was ranked the number one concern by 42 percent of those polled; “combating terrorism” and “the war in Iraq” clocked in at a distant second and third. Carville, a Democratic strategist, urged his party to convince Americans to associate “energy security” with Democrats in the way the public associated “tax cuts” with Republicans. “This is not something to add to the stew—this is the stock,” he told candidates looking to win the upcoming midterm elections.
Serendipity
Enter serendipity. The word serendipity was coined by the historian and politician Horace Walpole in 1754 after he read a Persian fairy tale in which three princes of Serendip “were always making discoveries, by accidents and sagacity, of things they were not in quest of”—thus the meaning: a fortunate happenstance or a pleasant surprise. While most of the world was fixated on eking out a renewable energy revolution that, according to President George W. Bush, would move the United States “beyond a petroleum-based economy,” the boom in unconventional oil and gas was brewing—and with it, an unexpected shot at deliverance from the strategic vulnerability created by America’s dependence on foreign energy.
As noted in earlier chapters, U.S. crude oil production nearly doubled between 2009 and 2015 alone, clawing its way back to 1970 highs of nearly 10 mnb/d. Natural gas production increased by 40 percent over the decade up to 2015. The United States became the largest energy producer in the world, outpacing Russia in natural gas in 2007 and Saudi Arabia in total oil production in 2013. The world’s only remaining superpower had once more become an energy super producer—a status it had relinquished more than forty years earlier.
Given a further leg-up by declining U.S. demand for oil for many of the years in question, these production increases reduced American net oil imports at an astonishing rate, from nearly two-thirds of consumption in 2007 to only one-quarter in 2016.
The specter of a growing, never-ending dependence on foreign natural gas was extinguished at the same time. Demand for natural gas continued to grow, but burgeoning domestic production all but squelched imports of LNG by 2012. Companies such as Cheniere Energy, which had gambled big in 2003 to build facilities on the U.S. Gulf Coast to import expected waves of LNG, took a second multibillion-dollar wager. Banking that this reversal of energy fortunes would turn the United States into an exporter of natural gas, they convinced investors to support their efforts to convert these facilities from importing LNG to exporting it. In the policy world, the debate seemed to shift seamlessly from handwringing over imports to concerns over exports, be it the lifting of the U.S. ban on the export of crude oil or the hoops American companies needed to jump through to export natural gas.
Americans today can be confident their energy position has changed materially for the coming decades. As discussed in Chapter Two, this is true even taking into account the uncertainties about the exact path of future American production and despite the fact that U.S. demand for oil has grown again after years of looking as if it would soon head in the opposite direction. (Witness the gusto with which Americans have been purchasing SUVs and light-duty trucks in response to cheaper gasoline.) As can be seen in the graphic below, regardless of what exact production path materializes, Americans can still expect their dependence on imported oil to be lower—in many cases dramatically so—in the coming decades than it was in the mid-2000s. There is even less uncertainty about future natural gas production, with nearly all companies and agencies forecasting continuous growth through 2035.
Figure 4.1: Projected U.S. Crude Oil Production Under Different Scenarios, 2005–2040 (million barrels per day)
Source: Energy Information Administration, Annual Energy Outlook 2015, www.eia.gov/todayinenergy/detail.cfm?id=20892.
Figure 4.2: Projected U.S. Net Petroleum Product Imports Under Different Scenarios (percent of U.S. petroleum product supplied)
Source: Energy Information Administration, Annual Energy Outlook 2015, www.eia.gov/todayinenergy/detail.cfm?id=20892.
The scale and swiftness with which the United States has moved from being an energy supplicant to an energy super producer is stunning; in modern history, it is rare for the strategic position of a single country to change so dramatically in such a short period. So rapid has this transition been that many of America’s policymakers and opinion shapers have been left in the lurch, still fixated on the vulnerabilities that used to come with large dependence on other countries for energy supplies.
Not a Bargain
In 2005, Andre Hoth, a computer geek and amateur musician from California, won a song contest sponsored by the nonprofit Americans for Energy Independence. Hoth’s entry, “A Crude Energy,” beat out contestants from six other states who had vied to pen a “rallying song” that would capture the importance of ending U.S. reliance on foreign sources of energy. As the winner, Hoth got to headline a CD of the top ten songs, including titles such as “Feedin’ Them Oil Hogs” and “EI Now” (a shortened reference to energy indep
endence).
At the time of this contest, energy independence seemed a long way off. Like an unrequited love, its unattainable nature prevented Americans from really evaluating whether its acquisition would be worth the pursuit. But a world in which the United States could meet all its energy needs seemed like an unequivocal good, certainly something worth singing about.
The new energy abundance requires the United States finally to scrutinize the energy independence for which it has long pined, and to do so with a head cleared of illusions. What would energy independence really look like? Two very different ideas are commonplace. The first defines energy independence as a situation in which the United States meets all of its own energy needs, without any reliance on international trade or global energy markets. In this scenario, America would be completely “self-sufficient” or “autarkic.” The second form of possible energy independence is one in which the United States is not separated from global markets, but simply produces more energy than it consumes.
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