“North America is becoming the new Middle East,” proclaims the energy analyst, Ed Morse, referring to the dramatic changes in oil and natural gas production in the continent made possible by advances in technology. These have enabled the United States of America to undertake offshore drilling operations for oil and gas in deeper and riskier waters and to tap its vast reserves of natural gas trapped in deep underground shale formations.
The conservative US Energy Information Agency estimates that by 2020, US daily crude oil production could exceed 10 million barrels — the current Saudi production level. The more optimistic Morse believes that the US will reach this level in the next three years — by 2015. New hydraulic fracturing (‘fracking’) technologies have enabled a more-than-sevenfold increase in US shale gas production over the past five years. Till recently, a major importer, the US is set to emerge as a net exporter of natural gas in the next few years.
Extensive shale gas deposits are also found in other parts of the world, including China. In 2009, the International Energy Agency doubled its previous estimate of global natural gas deposits, largely because of newly accessible shale gas. The agency has warned, however, that ‘fracking’ can cause devastating environmental damage unless comprehensive regulations are strictly enforced. ‘Fracking’ also requires an abundant supply of water. Many countries are currently not in a position to employ the new technology because they already suffer from water stress or because they lack the requisite knowledge, technology and administrative competence to operate effective environmental controls.
Ever since 1973, when the Arab countries precipitated an oil crisis by imposing sanctions in the aftermath of the Arab-Israeli war, it has been an axiom of US energy security policy to seek ways and means of reducing dependence on the politically volatile Gulf region for critical energy supplies. The US is finally poised to achieve this goal. By the end of this decade, the US will be able to meet its oil requirements from domestic sources, supplemented with imports from Canada, Mexico, Venezuela, Brazil and other countries in the western hemisphere. Gulf oil will mainly flow eastwards to Asian markets.
Will this make North America the ‘new Middle East’ of oil? The answer is both yes and no. Yes, in the sense that North American crude production may well approach that of the Gulf in the next decade. No, because North America, unlike the Gulf, will not be a net exporter of oil. The US may become the world’s largest producer, as some predict, but it will still remain a net importer given its vast appetite for oil.
The picture for natural gas is totally different. Till recently a major importer of natural gas, the US is now in a position to emerge as an important exporting country, thanks to shale gas and new drilling technologies. The US gas infrastructure is currently designed for importing liquefied natural gas. These facilities have become redundant because of the shale gas revolution. Plans are now underway for the construction of several LNG export terminals. If these projects receive government approval, the US will become a major player in international gas markets within the next few years. This could help alleviate energy security concerns in gas importing countries — such as India, the European Union and Japan — by lowering prices in regional markets and enabling them to diversify supply sources. Abundant and assured gas supplies may also break the existing link between oil and gas prices in many long-term gas contracts. This means that gas prices would no longer shoot up automatically every time there is a spike in the price of crude oil.
Before all this can happen, however, there is a potential obstacle that must be overcome. US legislation requires that every gas-export proposal must first be cleared by the department of energy on the basis of a determination that it is consistent with the US ‘national interest’. No criteria are laid down for determining the ‘national interest’. Only in the case of countries with which the US has a Free Trade Agreement (mostly Latin American countries) is an export licence deemed automatically to be in the public interest. On a case-by-case basis, some applications have indeed been cleared (including one applicable to India), but the US has yet to evolve a clear position that would allow permission to be granted expeditiously on a more or less automatic basis.
This question is currently being debated in the US. Those in favour of facilitating gas exports cite the traditional US commitment to free trade, the potential earnings from gas exports, and the employment that could be generated by a rapid expansion of gas production and distribution. The critics argue that restricting gas exports would ensure lower domestic energy prices to the benefit of US manufacturers, thereby increasing exports of manufactured goods and generating industrial employment.
The critics fail to recognize that much more is at stake than cheaper gas for US manufacturers. A negative decision on gas exports is bound to undermine US claims to global leadership. As advocates of gas exports have pointed out, a restrictive export policy is clearly inconsistent with the traditional US championship of a liberal global trade regime. Arbitrary export restrictions are inconsistent with GATT rules and could be challenged in the WTO.
Opponents of liberal gas exports also forget that the US cannot exhort others to act in the larger global interest and, at the same time, pursue a policy based exclusively on its own narrowly conceived self interest. US policies sometimes impose serious indirect burdens on its friends. The sanctions against Iran, for example, cause heavy collateral damage to the energy security interests of India and other friends of the US in Asia. A progressive reduction of imports of Iranian oil is only the visible tip of the iceberg. Iran has the world’s second largest conventional gas deposits, but these remain mostly unexploited because of sanctions against investors in Iran’s energy sector. Iran has no LNG export terminal because critical technologies are covered by US patents. Thus US policies have caused a major reduction in gas supplies for Asian markets, having an impact on regional energy costs.
Iran sanctions have also led to a major distortion in flows of Caspian and Central Asian gas and oil to world markets. Look at a map of Asia. The shortest and most economical routes by which Caspian and Central Asian energy resources can be brought to sea-ports and international markets lie through Iran. Since these routes have been blocked by sanctions, pipelines conduct the region’s oil and gas over thousands of kilometres to distant markets in the Europe and China. The pipelines travel westwards and eastwards but not southwards to Indian Ocean markets.
Such are the unintended consequences of US policy towards Iran. We have not made an issue of this collateral damage mainly because of our close and multi-faceted ties with the US. For precisely the same reason, we have the right as a friendly country to expect that the US will not deny us access to its own gas market. US critics of gas exports should ask themselves if India can sustain this policy in the long run if Washington were to deny us access to its own gas markets, after having deprived us of the benefits of unhindered access to some of the richest energy resources in our neighbourhood.
The US should take an early decision to liberalize gas exports, consistent with its global political and trade policies.