In economic terms, the US has been the clear winner from the dramatic changes in the global energy market over the past decade. Shale gas and tight oil produced from shale rocks have driven up production and reduced the need for imports. Some 1.7m jobs have been created as a result and, along with the reduction in energy costs, that has contributed to steady economic growth since the crash of 2008.
Shale developments in the country have helped to produce a fundamental shift in the world market — instead of being scarce, and ever more costly, energy is plentiful and prices have fallen. The only remaining question is whether the shift to an “age of abundance” is changing the global political landscape as well.
That is the theme of a new book by Professor Meghan O’Sullivan, who works at the Belfer Center in Harvard. Ms O’Sullivan is an optimist. She sees in “abundance” the chance for significant positive changes in the balance of power around the world, all of which would support the foreign policy objectives of the US government.
In the absence of scarcity there should be no scope for energy exporters such as Russia to use supplies of oil or gas as a tool to threaten adversaries. Europe will be able to diversify its sources of supply and avoid over dependence on Russian gas.
Low prices should encourage sensible reform in countries currently dependent on oil and gas revenues, such as the Gulf states. China should be able to access the resources it needs without exploiting and compounding the weaknesses of particular producing states.
The US itself could develop a much closer North American energy community, including Canada and Mexico. Lower costs for renewables should support collective action to combat the risks of climate change. The book has a single word title: “Windfall”.
Such optimism is admirable, but unfortunately the actual outcomes fall some way short of the aspirations. Russia continues to press ahead with the development of Nordstream 2, which will entrench Europe’s dependence and allow Moscow to isolate Ukraine. Although Kuwait and Abu Dhabi have developed relatively modern economies none of the Gulf states have escaped from reliance on oil revenues. Chinese engagement, driven by the desire to secure energy supplies from countries such as Venezuela has served to extend autocratic and destructive regimes.
Overall, the international impact of lower energy prices has been a transfer of wealth to consumers from producers — many of whom are facing growing debts as expenditure continues to exceed income. The sudden loss of revenue risks creating failing states in areas vulnerable to Muslim fundamentalism. Within the industry the age of abundance has shifted the focus of competition towards a fight for market share, but the results can be just as destabilising as the previous sense of scarcity.
One of the reasons why Ms O’Sullivan’s optimism has been misplaced is that the US response to abundance has been to draw back from engagement.
Energy independence is not complete — the US still needs net imports of around 5m barrels of oil each day — but the direction of change is clear and has been reinforced in the last few days by the publication by the Energy Information Administration of an authoritative forecast suggesting that thanks to the continuing surge in the production of shale oil total US output will rise to over 11m barrels a day by the end of this year.
But instead of using the opportunities offered by the changes in the market, the US has withdrawn to focus on its own internal agenda. Climate change is denied and the drive to find new solutions that are low cost and low carbon has slowed down.
Relations with Canada and Mexico are constrained by conflicts over trade policy and migration. Criticism of Russia’s role in the European gas market is muted and easily ignored in Berlin.
The US has lost interest in reform or democratisation in the Middle East and prefers to deal with gullible autocrats such as the Saudi Crown Prince. The number of empty posts in the Department of State is a good measure of the loss of interest in the world beyond Mar a Lago.
The recognition of the close link between energy and geopolitics is welcome, but substituting abundance for scarcity can mean that old problems are simply replaced by different challenges.
For some people, an age of abundance and low prices can be very positive. Overall, however, there is no reason for complacency or disengagement. An age of plenty is producing as many losers as winners, and as many dangers as opportunities.
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