Finally, the U.S. energy independence debate has taken a significant step towards a more serious discussion for what this actually means for Washington’s place in the world. As anyone reading my analysis (not just in Forbes, but around the world) will be aware, I’ve been banging the drum rather too loudly on the downside complexities this could bring for America. Being contrarian is a lonely place compared to pervasive group think that constitutes the ‘trans-Atlantic energy debate’ these days, but it never ceases to amaze me once the penny drops, how quickly analytical outliers become mainstream questions everyone asks. Cue Dan Yergin’s FT op-ed over the weekend, ‘US Energy Is Changing The World Again’. Get past all the normal stuff on American oil and gas gains, and Mr. Yergin finally poses some interesting conundrums:
‘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.
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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.’
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Hallelujah. Mr. Yergin has forced three core facts onto the table. The first is the North America will remain a Saudi price taker for the foreseeable future, (‘the logic of geopolitics’) should actually see WTI-Brent spreads narrow in the coming years. The second (although not directly put), is that the U.S. fiscal position / maritime presence in the Gulf is directly linked to China’s ongoing willingness to support the greenback. America’s strategic position in the sand has very little to do with direct oil supplies to the Atlantic Basin, and everything to do with Washington’s global geopolitical primacy.
Getting the ‘G2’ relationship right between America and China is fundamental to oil market stability in the next decade. And especially agreeing common rules on how MENA states should proceed from here. That links into his third, structural point: Markets are still sufficiently tight that without ongoing Saudi support to cover Iranian supply gaps, a sanctions strategy simply wouldn’t hold. The KSA is still the swing producer in play, and the one state that America needs to keep onboard to exercise broader geopolitical optionality elsewhere.
Welcomed stuff, but let’s not get too carried away. All of Mr. Yergin’s observations are merely statements of geopolitical fact for those that have been willing to ask the right analytical questions. To carry the debate forward, let’s actually start thinking what OPEC does about this new world; whether American can use its newfound geopolitical optionality to good effect? And the most fundamental question of all – who gains most from a cheap, energy abundant world: The U.S. or China? Give it three or four years, and the broader debate will stumble towards these questions. But for now, at least Mr. Yergin has helped turn contrarian insights from the past couple of years into geopolitical conventional wisdom. Citigroup et al. take note; tedious articles on American energy gains are officially dead. The real analytical game starts here…
By. Matthew Hulbert