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Shale: A New Kingmaker In Energy Geopolitics

John Bussey, The Wall Street Journal: As oil and gas flood into U.S. pipelines, relationships that defined how energy moved around the globe are shifting. How far that will go is open to debate.

During America’s Age of Imperialism, Henry Cabot Lodge famously said that “commerce follows the flag.” Send over U.S. gunships, and U.S. business will be right behind.

These days it may be the reverse. America’s shale oil and gas revolution—one of the biggest commercial bonanzas in generations—is itself shaking up the world order.

As oil and gas flood into U.S. pipelines, relationships that defined how energy moved around the globe are shifting. How far that will go is open to debate. A U.S. that no longer defends Saudi Arabia? A China with dominion over the Middle East?

“It’s already had an impact,” says Ed Morse, an energy expert at Citigroup C -0.35% . “In the geopolitics of energy, there are always winners and losers. The U.S. is going to win big, and someone else is going to lose big.”

The U.S. is already getting a lift. In 2005, it imported 60% of its oil. That’s down to roughly 42% now. The losers: the Middle East, Africa and Venezuela, sometimes unpredictable suppliers that over the years brought us oil shocks and price spikes. Though the oil market is global and an oil-field strike abroad can still raise prices here, America’s vulnerability to shaky regimes and despots is declining.

If the U.S. begins exporting its gas in earnest, Europe too may taste a bit more energy freedom. It’s currently shackled to the whims of Russia’s Gazprom the dominant gas supplier to the region. Moscow loves that leverage: In January 2009, during a spat with Ukraine, it cut gas to a large chunk of Europe, leaving industry to ration energy and households to shiver.

Gas exports could also give the U.S. a new card to play in trade talks.

“The value of a free-trade agreement with the U.S. just went up a heck of a lot for some countries,” says Karan Bhatia, a former deputy U.S. trade representative who is now a General Electric executive. Nations wanting access to gas through a free-trade agreement may now cede greater market access to U.S. business.

When the U.S. consumes its own oil, it drains less from global markets, leaving more for others. That can also have a big political payoff.

“Had it not been for this growth in U.S. production, the sanctions on Iran could not have been as successful,” says Daniel Yergin, author of “The Quest: Energy, Security and the Remaking of the Modern World.” The increase in U.S. production since 2008, he says, is equal to roughly 80% of what Iran was exporting before the sanctions. Countries that normally bought from Iran can find oil elsewhere. “It’s an example of the geopolitical impact of this renaissance in energy production.”

Other nations are trying to catch up. China is exploring its own shale reserves through a partnership between Sinopec and Chevron. But Rex Tillerson, CEO of Exxon, has said shale-gas development in China will take more time. In Central Europe, too, exploration is sluggish because of the geology of the region, the cost, and environmental concerns.

“There is a huge difference between the U.S. and the rest of the world,” George Kirkland, vice chairman of Chevron, told The Wall Street Journal in June. “You know a lot more about the actual geology” in the U.S.
Mr. Morse says the U.S. leads for other reasons, too. Along with Canada, Australia and the U.K., it has what many other countries don’t: fast-moving independent oil drillers willing to take risks, and capital markets willing to finance them. The resulting speed and innovation are tough for other countries to match.

That said, world order doesn’t trend in a straight line.

The U.S. will still be the cop on the beat protecting sea lanes, allies and the global economy, military experts say. But there are other kinds of influence.

“So the ships coming out of the Persian Gulf will turn left instead of right,” says John Hofmeister, former head of Shell’s operations in the U.S. “China will suck up the Mideast production the U.S. doesn’t need. That may reduce the leverage the U.S. thinks it ought to have in the Mideast if China becomes a bigger customer.”

Frank Verrastro, of the Center for Strategic and International Studies, similarly feels it is “premature” to herald a new U.S.-centric energy world. Countries like Russia have vast reserves and will help shape the global energy market for years to come, he says.

The politics at home are also a wild card. The U.S. must still address the laws prohibiting or heavily regulating the export of oil and gas. Some businesses, such as Dow Chemical want to keep the gas at home to cheaply fuel manufacturing here. And environmental groups, worried about climate change, fear that more gas and oil production would take the nation’s eye off critical goals, such as expanding the use of solar and other renewable energy.

This week, the Department of Energy demonstrated why the new balance of power in energy remains in flux. Several companies have requested permission to export liquefied natural gas from the U.S. The DOE has been studying the matter and now says its report is delayed until the end of the year—likely after the presidential election.

But these problems seem like luxuries compared with the oil shocks America has endured over the years. The U.S. is clearly empowered by its new energy bonanza. Commerce just got a big tailwind. And that will give the flag a lift, too.

The Wall Street Journal, 21 September 2012