US energy is changing the world again

American energy independence, for decades the preserve of quixotic rhetoric, has become a serious prospect thanks to the resurgence in US oil and gas output. The International Energy Agency this week projected that the US could overtake Saudi Arabia as the world’s biggest oil producer by 2020. Whether that happens or not, what is unfolding in the US will continue to change its economy and affect both international relations and the global energy outlook.

US energy independence is still far off. But a rebalancing of world oil production has already begun. The US will rapidly become much less dependent on oil imports and will soon join the ranks of exporters of liquefied natural gas. This is a dramatic change from the outlook just four years ago, when Barack Obama won his first presidential election. In 2008, the expectation was for decline in US oil production and an increase in imports. This fed a pervasive sentiment that American oil’s days were coming to an end.

Instead, US oil output has risen 25 per cent since 2008 and the IEA estimates it will increase a further 30 per cent by 2020, to 11.1m barrels per day. US petroleum imports have fallen from 60 per cent of consumption in 2005 to 42 per cent today.

The idea of “energy independence” was first proffered by Richard Nixon during the 1973 oil crisis. Every president since has held out the promise that the US could return to self-sufficiency and so, it was thought, become less vulnerable to Middle East turmoil and high prices.

Yet until recently, the only pertinent question seemed to be how quickly would the rate of oil imports increase? As it turned out, it was technology, facilitated by higher prices – and not grand policy – that have propelled the turnround of the past few years. Two developing technologies – hydraulic fracturing and horizontal drilling – were successfully combined to spark the US shale gas revolution. In a decade, shale gas has risen from 2 per cent of US natural gas production to 37 per cent. The US has overtaken Russia as the world’s largest natural gas producer.

Oil explorers soon began to apply these technologies to previously unproductive rocks. The result is the surge in what has become known as “tight oil” (owing to the density of rocks from which it is produced).

The economic effects of this revolution in unconventional forms of production are already apparent. The most immediate has been in employment – more than 1.7m jobs have been created. The development of shale gas and tight oil involves long supply chains, with substantial sums being spent across the country. It is these jobs that have made Mr Obama and many state governors supportive of shale gas and tight oil.

The impact will increase. By 2020, 3m jobs could be created by the energy revolution. Most will have salaries higher the average US job. This means more money for cash-strapped governments. By that year, government revenues from taxes and royalties arising from unconventional oil and gas could be over $110bn, according to analysis by IHS.

The other increasingly important impact is on global competition. US natural gas is abundant and prices are low – a third of their level in Europe and a quarter of that in Japan. This is boosting energy-intensive manufacturing in the US, much to the dismay of competitors in both Europe and Asia. Billions of dollars of investment are now slated for US manufacturing because of this inexpensive gas.

What about oil? The US will continue to be an oil importer for a long time but imports will decline sharply – partly because of increasing supply but also because US demand for oil has reached a peak. The nation will become more efficient in how it uses oil, with mandated improvements in car fuel efficiency. The US’s imported oil will increasingly come from the western hemisphere, especially Canada, which already supplies almost 30 per cent of total US oil imports. (Some refineries on the Gulf coast will probably still require specific types of oil from the eastern hemisphere.)

It is still far from clear how this shift will affect the strategic balance in the Gulf and the Middle East and US engagement – especially given the rising tension over Iran’s nuclear programme and the instability throughout the region. The debate about these considerations will be stirred by America’s future fiscal negotiations. But the question will not really be addressed until the crisis with Iran is resolved.

One geopolitical impact is already clear. Rising US oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

But US engagement in the Middle East is not simply about oil imports. The US buys only about 12 per cent of its oil from the Gulf. Its interest is less about how many barrels flow to the US and more about the overall accessibility and stability of supplies on which the world economy depends. After all, the US will be affected by any disruptions to the global market that drive up prices.

The significance of the rebalancing of world oil production goes beyond the Middle East to that most critical 21st century relationship – the US and China. Beijing will see an increasing share of its imports coming from the Middle East. At this point, China is de facto relying upon the US to undergird regional security and to maintain the freedom of the sea lanes on which it depends for its own oil imports. All this will require China and the US to develop a more explicit understanding and a framework for collaboration on oil security. The components of this framework will have profound consequences for the rest of the world. For in spite of the dramatic changes in production even a US that is less dependent on imported energy won’t be able to escape the logic of geopolitics and will still be deeply engaged with the world.

The writer, vice-chairman of IHS, is author of ‘The Quest: Energy, Security, and the Remaking of the Modern World’