US should flex geopolitical muscles from oil renaissance, forum told

The US should be less hesitant to use its expanded geopolitical influence after changing from a nation relying increasingly on oil and gas imports to one poised to be a major exporter, Manhattan Institute Senior Fellow Mark P. Mills said.

“There has never been that much new oil produced that fast in history,” he said in keynote remarks at a Mar. 22 Hudson Institute conference examining geopolitical implications of the US shale oil and gas revolution. “It completely shocked global markets. The US went from being a supplicant to a possibly major global influence.

“The issue of energy independence, which had seemed so important, suddenly was backward from what’s going on,” Mills said. “We have an opportunity for geopolitical influence that we haven’t exercised. Perhaps the next administration will explore forming partnerships with our allies to facilitate more oil and gas exports.”

Mills questioned the idea that crude prices plunging from $100/bbl to $30/bbl in 18 months will have long-term impacts on US oil production as projects were canceled and workers were laid off. The independent producers who figured so prominently in US shale oil and gas production growth have made their operations more efficient and economic, Mills said.

This year, Mills said, will be “a defining” one for many producers “because their hedges are coming off and they’ll have to pay real prices.” He noted that more importantly “there are billions of dollars in capital lined up to invest in distressed companies and aggregate them into stronger competitors.”

He said, “Technology also has made huge swaths of America’s oil fields profitable at $30/bbl. The reality is that we need to change policies so we can export more oil and gas.”

A series of influences

Other speakers, however, were less confident that the US could use its relatively new oil and gas abundance to wield significant diplomatic influence.

“From the industry’s perspective, there are limits to using energy as a policy tool,” said Edward Chow, who spent 20 years working for Chevron Corp. in US and overseas capacities before becoming a senior fellow at the Center for Strategic and International Studies’ Energy and National Security Program.

“The shale revolution didn’t happen overnight,” Chow said. “It started with basic research in the 1960s and ‘70s when gas prices were low and domestic production was falling. But its benefits also were stimulated by non-oil technology growth and private ownership of land.”

Chow said, “Its impact on Europe was evident well before we became an LNG exporter. The earlier imports our growing domestic production replaced became available for other markets, putting pressure on other suppliers’ prices. Last week, the first US LNG export cargo arrived in—of all places—Brazil.”

Europe and Russia are each trying to diversify—the first by getting more gas suppliers, and the second by trying to sell more gas to China and East Asia, noted another speaker, Hudson Institute Senior Fellow Hannah Thoburn. Lithuania is working to get US gas, and Poland, which has opened its first LNG terminal, is importing from Qatar and constructing a transmission grid across other Baltic states, she said.

But Brenda Shaffer, an adjunct professor at Georgetown University’s Center for Eurasian, Russian, and East European Studies, warned that some Eastern European countries may be making a mistake by thinking heavy reliance on LNG and floating storage is an easy way to diversify their gas supplies. Costs are much greater than pipeline gas and could drive demand to coal and alternatives, she said.

“At the end of the day, there’s still a gap between LNG and cheaper pipeline gas from Russia or elsewhere,” Shaffer said. “There also are significant infrastructure problems. The percentage of gas also is not a fair measurement of a country’s supply security because each has different requirements and limitations.”

When Mills suggested that the US has an overwhelming advantage in its oil-field service and supply expertise, Chow conceded that it’s relatively permanent because so much of that technology can’t be transferred overseas. “But it could be adapted,” Chow said. “Once it successfully is for the first time—no matter where it happens—other countries will realize they can do it too.”

Maintain strategic interests

A strong US global oil and gas supply position does not mean the country should neglect its interests in the Middle East and Persian Gulf, speakers agreed. “I’m not a huge believe in energy geopolitics,” said Nikos Tsafos, president and chief analyst at enalytica, an energy strategic services company. “Middle East producers are better equipped now to withstand an oil price downturn. There may be shocks, but it’s difficult to quantify their geopolitical effects.”

The last time crude prices rebounded, most Middle East producers used the windfall to pay down debt before spending money on new projects, Tsafos said. “It’s hard to draw a line between depressed oil prices and governments’ policies,” he said.

“It comes down to each country’s circumstances,” Tsafos said. “Sometimes, a weakened government tries to do something strong to retain its domestic political credibility. It would be a mistake to try and leverage abundant US gas to stick it to Gazprom. Purely political decisions can create long-term problems.”

US oil product exports before the crude export ban was repealed “led to our eating European refiners’ lunch,” Chow said. “Once we decided to export crude, those refineries could start receiving it. It’s in the US interest to encourage this because it would have hardly any effect on US product exports to other foreign markets. There’s also a lesson here of tapping indigenous resources as we did in North America that Europe should take a closer look at.”

US production also could recover more quickly than many experts believe, Mills said. “If the price stays over $40/bbl for the next few months, we’ll see a second shale-oil revolution begin,” he indicated. “We could see a period of several oil and gas gluts where prices stay lower. It would be not just the biggest wealth transfer in history from major oil producing nations and oligarchs to a group of independent producers, but also potentially the biggest geopolitical change in decades.”

Contact Nick Snow at [email protected].