Tuesday, 20 November 2012

Energy Independence for the USA?

Take a good look around the room you’re sitting in. Anything which is made of plastic is an oil based product. Anything which you did not personally dig out of the ground was transported to you using oil. Like it or not, the global economy is utterly dependent on this resource. A great deal of fuss has been made of the recent International Energy Authority report which argued that by 2020 the USA will be the world’s biggest oil producer, and will be more than self sufficient by 2030. This fuss is justified, but perhaps not quite in the way that people think.

The key thing to understand about oil as a resource is that the oil market is integrated on a global level. This means that instead of thinking about where each individual country gets its supplies from, we need to think about a single global level of supply, and how it matches a single global level of demand. Once we understand this, we can understand the real significance of the US increase in oil production.

It will not mean that the US is insulated from the economic effects of an oil price shock. If, for example, OPEC were to repeat what happened in 1973 and constrict oil production then the US would suffer a dramatic recession, despite theoretically being able to supply itself. In reality the US would be contributing to a global ‘bathtub’ of oil production, which without the OPEC contribution would have shrunk yet would still be expected to meet the same level of global demand. The oil price would rise sharply, causing said global economic crisis.

It follows from this that the USA, and indeed everybody else, will still have an interest in maintaining global supplies. Wars in oil rich Middle Eastern states will still be likely, although the participants may change. In a world where geopolitical power is not just concentrated in the USA (hello China), more countries can be expected to have an interest in a global resource such as oil, and be more willing to act to secure it rather than free riding on the back of US actions as happens now.

So far, the increase in US production looks pretty irrelevant. This would be a foolish view to take. If, as the report predicts, the US is exporting oil by 2030, then that’s a huge source of revenue. A quick glance at the architecture in Qatar is testament to the enormous wealth that oil generates. That won’t go amiss in the USA. The diversification away from the Middle East should also make the global oil market more stable, so OPEC’s influence will be diminished, even if it is not removed. It should be noted that the increase in US supply is a result of shale oil, which is extracted by “fracking”, a process with grave environmental consequences. These, and the climate change which comes with a hydrocarbon economy, will need to be dealt with.

The overall point here is that the USA becoming an oil exporter will be an important geopolitical trend in the coming decades, but to understand its significance we have to break away from the false idea of ‘energy independence’ that has obsessed US leaders since the 1970’s. Oil doesn’t work like that.  

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