A Lemonade Stand with One Customer?
Canada’s energy fortunes also play into whether a North American energy independence will be achieved. While Mexico’s energy reforms captured headlines, Canada’s energy fortunes have also been in flux—bolstered and buffeted by the unconventional boom. For Canada, “unconventional resources” refer less to those extracted by fracking and more to the vast oil sands—or bitumen—exploited through very different extraction processes. (Remember that the term “unconventional” does not refer to the specific types of molecules in the resource, but the method by which they are extracted.)
Canada’s unconventional boom well preceded that of the United States. Between 1980 and 2014, Canada’s oil output more than doubled, with virtually all the new production coming from the oil sands and a significant share coming online since 2000. Calgary, the capital of Alberta—the province where virtually all the oil sands are located—boomed. Its population grew by more than a third just between 2000 and 2014. Dating advice columns urged single Canadians to “go west” to Alberta, the only place in the country where men outnumbered women under the age of sixty. Demand for housing skyrocketed, forcing up real estate prices by 50 percent in 2006 alone. Calgary’s annual Stampede festival continued to grow in scale and extravagance, with a record 1.4 million people attending the ten days of rodeos, parades, concerts, and chuck wagon racing in 2012.
The proven ability to extract the resources locked in its oil sands not only boosted Canada’s overall output, but also catapulted the country into the top three holders of oil reserves in the world. In 2003, almost without fanfare, the annual rankings of global oil reserves listed Canadian reserves at 180 billion barrels—up from only 5 billion just a year earlier. A Canadian trade group had convinced a ranking agency to include Canada’s oil sands in its reserves number for the first time, and, literally overnight, Canada went from ranking twenty-second in the world for its oil reserves to being third behind Saudi Arabia and Venezuela. Several years later, after much lobbying from the industry, the American Securities and Exchange Commission also revised its definition of reserves of oil and gas to include unconventional resources.
Yet Canada’s unconventional boom has had its own particular vulnerabilities. As long as the price of oil stayed over $80 or $90 a barrel, Canadian oil sands production looked set for robust growth, which would more than make up for the continued decline in Canada’s conventional oil production. But the oil price plunge beginning in 2014, fed by the supply glut brought on by U.S. tight oil production, put Alberta—and its resource-dependent economy—on an austerity diet. Given the major investments and long time horizons required to develop oil sands, Canadian production will likely continue to climb for the medium term even in the face of low prices, but investments in future production have been curtailed as investors see less of a rationale for developing relatively expensive resources with energy prices not expected to return to earlier highs. As of June 2016, despite a downward revision, the Canadian Association of Petroleum Producers was still expecting positive growth in Canadian oil production out to 2030, but at lower levels than anticipated.
America’s shale gas bonanza has, at least in the short and medium terms, also meant more hardship than opportunity for Canadian energy. As of 2017, the United States remained virtually the only foreign customer of Canadian oil and gas. Nearly three-quarters of Canada’s oil production and almost half of its natural gas production flow to its southern neighbor; the rest is consumed domestically. As a result, Canada’s only export market for its natural gas rapidly dried up as shale gas began to flow in the United States and America began to meet more and more of its own needs. Having no other outlet for its gas, and a small domestic economy unable to absorb the excess, companies in Canada were forced to rein in production, which dropped by a fifth from 2005 to 2013. Although projections for the future suggest burgeoning Canadian natural gas production and export, realizing these visions will require capturing new markets and building new infrastructure to deliver the gas that the United States no longer craves. As of 2016, Canada had no capacity to export LNG beyond trucking small quantities of it across the border to New England, despite multiple active plans and proposals for the construction of pipelines that would make LNG exports possible.
Despite these uncertainties, North American energy independence among the United States, Canada, and Mexico is feasible, even without costly policy interventions targeted to this goal. North America as a whole is on track to become a net exporter of energy—including oil and gas—by 2020. This would be not just at an aggregate level in terms of btus, but in each type of energy source. Indeed, the United States, Canada, and Mexico had the ability to collectively meet all their natural gas needs in 2015 and could at least theoretically collectively meet their demands for petroleum and other liquids by 2020. Mexico’s growing need to look beyond its borders for natural gas will be more than met by increased U.S. production. Both Canada and Mexico produce more petroleum and other liquids than they consume, with the excess more than meeting the future remaining thirst of the United States for imported oil beyond its own resources.
Enter the Politicians
American president after president has declared the need to pursue energy independence. Yet, one might be surprised that recent leaders have frequently adopted or advocated for policies that work against the most feasible and attractive version of this concept—North American energy independence. Rather than prioritizing the ability of the continent to collectively meet all of its energy needs, other objectives have gained hold in Washington that seem to override the prospect of attaining North American energy self-sufficiency anytime soon.
Figure 4.3: North American Net Imports of Petroleum and Other Liquids (million barrels per day)
Note: The U.S. EIA reports Mexico and Chile together; Chile’s numbers are, however, stable and small; they do not distract greatly from the bigger picture above. Solid lines are actual, whereas dotted lines are projections.
Source: Derived from U.S. Energy Information Administration, Annual Energy Outlook 2017.
One recent indication of this dynamic was the rejection by President Obama of a permit application to build Keystone XL—a pipeline intended to deliver 730,000 barrels of Albertan oil sands to U.S. refineries on the coast of the Gulf of Mexico, either to be consumed in the United States or exported. After a laborious, multiyear process of evaluation, President Obama announced the decision to reject proposals for this pipeline in part based on the need for more robust action to combat climate change. The argument was not that Keystone XL would significantly add to climate change problems; multiple State Department assessments of the pipeline proposal found that the new infrastructure was unlikely to alter global emissions because a U.S. rejection of it would not prevent the development of the oil sands. Instead, President Obama’s statement rejecting the pipeline focused on how it would damage America’s ability to lead on the issue of climate change. This did not have to be the case. President Obama might have taken the approach that Canadian Prime Minister Justin Trudeau pursued a couple of years later; he could have approved the pipeline and coupled it with steps to support renewable energy or other climate friendly policies. Yet, President Obama’s words were unqualified: “America is now a global leader when it comes to taking serious action to fight climate change. And frankly, approving this project would have undercut that global leadership.”
Figure 4.4: North American Net Imports of Natural Gas (trillion cubic feet per year)
Note: The U.S. EIA reports Mexico and Chile together; Chile’s numbers are, however, stable and small; they do not distract greatly from the bigger picture above. Solid lines are actual, whereas dotted lines are projections.
Source: Derived from U.S. Energy Information Administration, Annual Energy Outlook 2017.
Soon after taking office, President Trump reversed this decision and revived prospects for the Keystone XL Pipeline. It is, however, harder to undo the lesson that Canadians
took from the multiyear episode before its permit was first rejected—and the setback to North American energy independence that followed. Decisions and delays made in Washington convinced the Canadian government that it cannot be energy secure as long as the United States remains Canada’s only market for its energy exports. Previous to the experience with Keystone XL and America’s own unconventional boom, “Canadians just took it for granted that the U.S. could take all the oil and gas that Canada could ever produce,” said Preston Manning, once a political ally of former Canadian prime minister Stephen Harper.
But after a tense 2011 phone call in which President Obama informed Harper of another delay in Keystone’s approval, and a subsequent heated exchange between the two men at a picnic table on the margins of the Asia-Pacific Economic Cooperation summit that same week, Harper reportedly ordered his cabinet to begin the exploration of alternative export routes so that Canada could sell its energy to non-U.S. customers. Neither Harper nor his cabinet members were shy about their plans to court Asian consumers for their oil. As former U.S. ambassador to Canada Gordon Giffin explained to me, “There was a patriotic response that Canadians were not going to let Americans decide whether or not they can move their oil.”
Bringing Canadian oil and gas to “tidewater” for export beyond the continent has proven more difficult to achieve than anticipated, particularly in the low-energy-price environment. Since that cabinet meeting in 2011, Canada has run into its own domestic difficulties in moving its resources east and west for export. Numerous pipeline proposals have faced challenges from environmental groups and First Nation communities. The low oil price environment has made it harder to accommodate the demands of these groups while still keeping the projects commercial.
Yet, even with these obstacles—and even with the reversal on Keystone XL—Canadian efforts to develop the capacity to export their energy to other markets continue and will eventually succeed.Bringing Alberta’s oil and gas to the Canadian tidewater would free the country’s energy exports from the whims of U.S. markets and American politics. At that point, reaching North American energy self-sufficiency would still not be impossible, but would be harder to achieve given that Canada would be sending its oil exports to many countries, not just the United States. Yes, Canada might in the future have sufficient excess production capacity to meet both U.S. demands and a portion of Asian ones, but it is unlikely to forget the lesson of Keystone quickly. Diversifying its energy markets, rather than doubling down on American ones, will remain a political priority. Meanwhile, without the full participation and cooperation of Canada, North American energy self-sufficiency would become harder to attain.
Similarly, for an administration so vocally committed to achieving energy independence, many of the Trump Administration’s early positions could actually work in the opposite direction, by undermining the prospects for North American energy independence. In particular, many of the policies articulated toward Mexico could jeopardize the progress that country is making in reviving its oil sector—thereby making it harder for the continent to meet all its own energy needs.
Most worryingly, the populism and nationalism of the Trump era has spurred a reaction in Mexico’s own domestic politics, empowering political candidates opposed to the historical energy reforms. Andrés Manuel López Obrador—known by the moniker AMLO—is Mexico’s own combative populist. He is a lifetime politician who first came to national prominence by organizing protests against environmental damage caused by PEMEX and exposing electoral fraud of the long-ruling Mexican party, the Institutional Revolutionary Party or PRI. He lost the presidential elections narrowly in 2006 and again in 2012. But the rhetoric of Donald Trump as candidate and president has bolstered López Obrador’s popularity as Mexicans search for a figure who can be a forceful leader for Mexico in potentially adversarial times. As of early 2017, Mexican polls showed AMLO as the individual most favored to win the presidential elections of 2018. If López Obrador takes the head office, Mexico’s energy reforms could stall or at least lose momentum. Not only has López Obrador long been an opponent of these reforms, but he has made clear his intentions to undo them if given the opportunity. In 2013, shortly before the reforms were finalized, López Obrador sent a letter to then–ExxonMobil CEO Rex Tillerson—as well as nine other CEOs of international oil companies—telling him that investing in Mexico “would be like buying goods without a receipt, something crooked, tantamount to piracy.” As the IEA assessed in a 2016 study of Mexico’s energy sector, the Mexican economy stands to gain more than $1 trillion as a result of the reforms; in contrast, the “no reform case” explored by the IEA creates a major drag on the Mexican economy as a whole, which would have many implications for the United States, including significantly less demand for its natural gas exports to Mexico.
Even should López Obrador’s presidential ambitions once again be thwarted, the nationalism of President Trump’s “America First” approach has made many in Mexico—as was the case in Canada—think twice about complete dependence on the United States for critical natural gas imports. Lourdes Melgar, a soft spoken but razor-sharp former Mexican deputy secretary of energy, told me in 2017 that, “People used to think I was crazy when I warned against complete reliance on the United States for the natural gas that is a critical fuel for generating Mexico’s electricity. But, today, many share my view that Mexico must have other options than American gas, at least as an insurance policy.” With almost two-thirds of all U.S. natural gas exports flowing to Mexico in 2015, and Mexico’s demand for natural gas climbing at a steep rate, the United States can only lose from a growing national sentiment that Mexico should minimize dependence on its northern neighbor.
Finally, the fate of the North American Free Trade Agreement (NAFTA) has major implications for American energy companies working in Mexico and—most relevant to the question of North American energy independence—Mexico’s ability to reach new production levels. Throughout the 2016 U.S. presidential campaign and the early months of the Trump administration, President Trump spoke passionately about the need to renegotiate NAFTA, calling it “the single worst trade deal ever approved in this country” in the first presidential debate; in other exchanges, he made clear his willingness to withdraw from the trade pact if necessary. Abandoning NAFTA could crimp Mexican energy development, particularly by American companies, in at least two ways. First, it would remove some of the efficiencies that make it so easy for U.S. companies to operate in Mexico. Thanks to streamlining of customs and approvals under NAFTA, companies can move equipment and people across the border almost seamlessly. A senior industry official based in Mexico explained this to me vividly. “If I need a highly specialized piece of equipment from the United States, I can have it anywhere in Mexico in 36 hours,” he said. “If I were seeking to use that equipment in Colombia, it would take more like 36 days, and in Argentina, closer to three and a half months.”
Second, and of even greater concern, are the investment protections under chapter eleven of NAFTA that American companies could lose. The mechanisms established in this chapter of the trade pact are intended to ensure that all parties have access to an impartial tribunal if there is a dispute over an investment; investors claiming a host government has violated the terms of their investments have recourse to one of several international arbitration mechanisms. While some opponents of NAFTA have objected to these provisions as a violation of sovereignty, they have effectively provided companies investing in Mexico an alternative to addressing disputes under outdated and less friendly local laws. If NAFTA is scrapped, companies would lose this important layer of protection, again, making it less attractive to invest and operate in Mexico.
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Now that some form of energy independence is at least feasible, the American conversation about it needs to move beyond aspirational language. A close examination of the concept—and the steps likely needed to achieve some variations of it—should dampen American fascination with the idea. Energy independenc
e is not the unadulterated good that many Americans suppose. However, one form—North American energy independence—is possible without unreasonable and costly contortions. Yet, even there, its pursuit involves tradeoffs across other policy priorities. Politicians and policymakers who move beyond general exhortations of energy independence to understand its pros and cons will be best positioned to make these tradeoffs. Some will match their rhetorical love of energy independence with action, while others will not. Either way, an analytical understanding of the concept needs to be part of the calculation.
Another approach altogether may make more sense. Rather than focusing on the narrow drive for energy independence, policymakers, pundits, and voters could open their eyes to the real benefits of the energy boom and see the ways in which the new energy abundance is already bolstering American strategic and economic positions. With some notable exceptions, the new energy landscape has altered the international landscape to the advantage of the United States; this reality will become apparent in the third section of this book. But the new energy abundance has also, for the most part, augmented American sources of strength. The next two chapters reveal how this energy environment is reinforcing the foundations of American power, fortifying its hard power and buttressing its soft power.
FIVE
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Hard Power Accelerator
When President Ronald Reagan entered office in 1981, the United States was already in a downward economic lurch. The real median family income had begun to decline in 1979, dropping more than 7 percent by 1982. Meanwhile, the poverty rate was creeping upward and would increase by a third between 1978 and 1983. Interest rates were soaring; the prime rate had peaked in 1980 at 21.5 percent. The stock market continued its anemic performance. Then, months after Reagan stepped into the Oval Office, the situation got worse. A severe recession began. Unemployment peaked at over 10 percent at the same time that inflation reached double digits.
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