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Walter Russell Mead: The Energy Revolution And Its Biggest Losers

Over the past year, we’ve been watching a geopolitical revolution get underway. It’s much bigger and more consequential than the Arab Spring, though the legacy media are giving it much less play. It will rearrange the global chessboard, improving the position of some powers, weakening others. It is a powerful boost to American power, reducing America’s strategic and economic liabilities while adding considerably to its assets. And it dramatically changes the long term outlook for, among other things, the US dollar. In line with Via Meadia‘s policy of trying to focus attention on the most consequential events of the time, we will be following this story as it unfolds, looking at the implications of the shifts now underway for world politics, the US economy, our domestic politics, and the green movement.

While the chattering classes yammered on about American decline and peak oil, a quite different future is taking shape. A world energy revolution is underway and it will be shaping the realities of the 21st century when the Crash of 2008 and the Great Stagnation that followed only interest historians. A new age of abundance for fossil fuels is upon us. And the center of gravity of the global energy picture is shifting from the Middle East to… North America.

The two biggest winners look to be Canada and the United States. Canada, with something like two trillion barrels worth of conventional oil in its tar sands, and the United States with about a trillion barrels of shale oil, are the planet’s new super giant energy powers. Throw in natural gas and coal, and the United States is better supplied with fossil fuels than any other country on earth. Canada and the United States are each richer in oil than Iraq, Iran and Saudi Arabia combined.

Further bolstering America’s new geopolitical edge, the rest of the western hemisphere is also rich in oil. Venezuela is now believed to have more oil that Saudi Arabia, and Brazil’s offshore discoveries make it a significant factor in world oil markets as well.

China is another winner, though on a smaller scale. China has the second largest shale oil reserves in the world, estimated at about half the size of America’s. This puts China in the Saudi class as well, but given the anticipated growth in China’s economy, its shale oil wealth will reduce but not end its need for energy imports.

The other important change in the new world energy picture is one I wrote about earlier this week: Israel’s potential emergence as a major oil and gas producer. With trillions of cubic feet of natural gas, and potentially as much as 250 billion barrels of recoverable shale oil, Israel may be on the verge of joining the wealthiest Arab states as a world class energy producer.

These changes won’t take place overnight, but they are coming faster than many understand. US domestic oil production is up almost half a million barrels a day thanks to North Dakota, and the surge in US natural gas production is already changing international trade patterns. More change will come.

The Biggest Losers

If the US, Canada and Israel are the likeliest big winners, the biggest losers in the coming shift will be the Gulf petro-states and Russia. Their Gulf losses aren’t going to be economic; the Gulf will still have the world’s cheapest oil to produce and so its oilfields will be the most profitable at any given price point.

Russia, on the other hand, is going to have a harder time. Its oil and gas are more expensive to produce and so Russia’s profit margins are likely to fall.

But regardless of the simple economic impact, in different ways and different degrees the Gulf countries and Russia are going to lose a lot of the political advantages that their energy wealth now gives them. They will have less ability to restrict supply and to manipulate prices than they have had in the past. Oil and gas are going to be less special when supplies are more abundant and more broadly distributed.

The unexpected success of the economic sanctions on Iran show how this process works. Rising production in Iraq, Saudi Arabia and the United States enabled the world to do something most people would have thought impossible in the golden age of OPEC. Iran’s oil sales have been cut by something like 40 percent even as world crude prices fell. Iran’s Supreme Leader believed that the world needed his oil so much that the US could never get the Europeans and others to agree to serious sanctions. He was like Jefferson Davis in 1860, who believed that Britain and France needed Confederate cotton so badly that they would force the North to recognize Confederate independence.

The Supreme Leader, like Davis, was wrong. The world survived without Confederate cotton, and the world is surviving with less oil from Iran. In fact, even as Iranian production declined, world oil prices fell.

What Iran is discovering today, others will feel tomorrow. Since the 1970s, the states on both sides of the Gulf have been central to all kinds of global issues, and the great powers have focused enormous amounts of time and attention on their wants and needs. As the energy revolution proceeds, they won’t completely sink into insignificance (and the US concern to protect the independence of countries like Saudi Arabia, Kuwait and the rest won’t disappear), but the days when the world hung on every word that fell from the lips of OPEC are gone.

More, the political importance of the Gulf derives in part from the intersection of energy politics and national policy in many European countries. In places like Italy, France and Greece, national oil companies have much greater power in national politics than they do in the US. (The US has more oil companies, and there are more corporate and regional interests competing against what the oil companies want.) The ability of the Gulf countries to make or mar the fortunes of foreign oil companies has been an important source of political power for them. This power won’t go away, but it won’t be the same. There are lots of new places to look for oil these days, and with more countries interested in attracting international investment, the balance of power will shift from resource rich countries to firms with the capital and skill to turn those resources into revenue.

Coming back to Russia, the biggest threat to Moscow’s hopes for rebuilding its power based on energy resources comes from the discovery of huge natural gas reserves under the eastern Mediterranean seabed. Russia can and will do what it can to join in the exploitation of these resources; Greece, Cyprus and Israel are all willing to cooperate with the Russians when it comes to exploitation and processing.

So Gazprom won’t starve — but it could lose its ability to stop the flow of natural gas into western Europe. New pipelines will be built from Greece north and east and while a friendly Greek government and a strong capital position for Russian companies in the Greek gas business could give Moscow an edge, the Greeks are unlikely to allow Russia to turn Europe’s gas taps on and off at will. Additionally, new terminals on the Atlantic coast will be built to take LNG shipments from the US. As the world gains experience with fracking technology, and the carbon benefits of natural gas as opposed to coal grow more obvious, look for Europe to do more to explore its own considerable potential to develop gas fields. Russia will continue making money selling gas and oil to Europe, but the political consequences of this trade will likely disappoint.

Another group numbered among the losers: energy states who finance unorthodox economic policies and anti-US foreign policies on the basis of their oil wealth. It will still be easier for the president of Venezuela to thumb his nose at the US and spend money on programs that build up his political strength at home than, say, for the president of Guatemala to do that, but as world energy supplies continue to flow, both the financial and the political benefits of having a lot of oil are going to diminish. Hugo Chavez’ successors are likely going to have to watch their wallets and watch their words a little more closely than the Great Bolivarean has done.

These changes won’t materialize overnight. We are so far seeing only the first stages of new energy geopolitics. But one way to begin getting your head around the new geopolitics is to think about a world in which Kuwait matters less, and Alberta more.

Over the next couple of weeks I’ll be coming back to this subject, looking at some other aspects of this big, complicated set of changes coming down the pike: how the change will affect the winners and world politics as a whole, what the environmental and economic consequences are likely to be, and how politics in the US may change. And going forward, Via Meadia will do its best to follow the energy revolution in the news of the day — keeping an eye both on the progress or the lack of it at bringing the new potential sources online and on the ways world politics shift in response.

The American Interest, 10 July 2012