United American Emirates, The New UAE?

An LNG carrier ship at the Cheniere Energy terminal in Sabine Pass, Texas. Source: Lindsey Janies/Bloomberg/Getty Images.

Will the American shale boom alter the global balance of power?  

As recently as five years ago, energy analysts were in agreement the U.S. would need to begin importing natural gas to keep up with rising consumption amidst depleting domestic reserves. Fast-forward half a decade and the U.S. sits atop one of the largest natural gas reserves in the world, looking to break into the lucrative global energy market.

As U.S. supplies have multiplied almost overnight, U.S. gas prices have tumbled to near-record lows. According to the U.S. Energy Information Administration, the average domestic price of natural gas hovers around $3-4 per one million BTU; overseas, the same volume of gas can run as high as 400% more. Thus, domestic producers, hoping to capitalize on regional price fluctuations in the global market, are looking to quickly sign long-term contracts with gas-hungry countries.

One dramatic example of this shift is at the Sabine Pass gas terminal in Louisiana. At the pass, Chevron and Total Gas and Power (France) are collectively paying $250 million per year to the terminals’ operator, Cheniere Energy, until 2029 to use the facility to import natural gas.  However, with virtually no liquefied natural gas (LNG) entering the terminal, Cheniere are now pocketing millions for doing next to nothing.[1] Instead, Cheniere have begun looking to export America’s virtually endless store of shale gas. Thus, in 2011, Cheniere signed a 20-year contract with GAIL, an Indian energy company, to export 3.5 million tons of LNG annually from the same port.[2]

With more than two-dozen LNG export applications filed at the Department of Energy to date, the U.S. looks set to rebrand itself as an energy juggernaut on the global stage. But, in spite of the prospect of mouth-watering profits for shale producers from foreign trade, opposition to exports still exists. Some domestic industries believe that the U.S. could throw away its newfound comparative advantage in manufacturing and chemical production, which uses natural gas as a feedstock, if it began actively exporting LNG and “locked” itself into the volatile global gas market. Environmentalists oppose exports because they believe it would lead to even greater natural gas production, which may risk severe ecological destruction.  These critics have received backing from Representative Ed Markey (D-MA), who sponsored legislation last year to ban all natural gas exports  from the United States.

However, despite these groups’ best lobbying efforts, a series of recent factors indicate substantial American exports may be inevitable. First, the publication of a study by NERA, a prominent economic consulting agency, concluded that under all export scenarios, the U.S. would reap a net benefit from trade. The study, published last December, was officially commissioned by the DOE. Second, there have been several signs from the White House that exports have become a second term priority for the administration. In May, Obama called on the U.S. to be a net gas exporter by 2020 and said his administration would study each export application on their individual merit.

Senior White House advisers have also indicated that restricting natural gas exports would weaken America’s ability to challenge Chinese restrictions on the export of rare earth metals at the WTO. According to Michael Levi, a Senior Fellow at the Council on Foreign Relations, these metals are “critical to a variety of defense, electronics and energy technologies.” He goes on to indicate that the same arguments the U.S. could “invoke…to restrain LNG exports…are precisely those that China would…use to defend its own restrictions.” Finally, the current pace of export approvals have occurred at a much faster rate than previously anticipated. The Dominion Cave Point authorization at the beginning of September brought the rate of new project approvals to “one every 6-8 weeks,” as reported by John Kemp, Reuters’ Financial Commodities Columnist.

If the Energy Department allows the domestic industry to reach its full potential, America could have the ability to curtail the international weight of Iran and Russia as both nations rely heavily on funds from natural gas exports and the threat of cutting them off to conduct their foreign policy.

With respect to Iran, American exports would pose an economic danger to the Ayatollah’s regime and provide substantial “buy-in” for continued international pressure on the “rogue” nation. This combined threat would likely increase the efficacy of sanctions against Tehran; consequently reducing the likelihood of Iranian nuclearization as the regime would have less in its coffers to spend on defense.

First, exports would provide Ankara, which receives 20% of its natural gas from Tehran, with a means of weaning itself off Iranian gas. With 90% of Iran’s shale headed to Turkey, cutting off Turkish demand would prove disastrous for the Iranian economy in the short-term.[3] Second, according to Sanjay Puri, CEO of the Alliance for U.S.-India Business, India has been forced into talks with Iran and Pakistan over a shale pipeline to meet its growing energy needs. However, if the U.S. were to boost its shale exports to the sub-continent, it would most likely jettison these talks. Thus, mitigating Iran’s long-term prospects for growth.

Third, it is much more likely the international community would be willing to continue with intense economic sanctions if powerful nations do not need to rely on Iran to meet their energy needs. For example, India would be more willing to participate in putting pressure on Tehran, though it has been reluctant to do so in the past, if a U.S.-India LNG pact were struck. On the other hand, if the U.S. were to delay its LNG exports for at least another decade, Iran could potentially use its gas resources to “drive a wedge” in the powers aligned against it.[4]

If Iran used its shale reserves to finance the completion of its nuclear weapons program, it could spark a dangerous round of proliferation throughout the Middle East and exacerbate the sectarian tensions in the region. Some skeptics of the dangers of nuclear proliferation argue that a stable balance of powers could emerge  similar to the dynamic between the U.S. and Russia during the Cold War. Setting aside the fact the U.S. and Russia were extremely close to all-out war on numerous occasions, the relationship between those two doesn’t apply to the crises currently facing the Middle East. The U.S. and Russia were not close neighbors locked in “a generations-long history of enmity” similar to the animosity shared between the Sunni and Shiites. If Saudi Arabia were to acquire nuclear weapons in response to Iranian nuclearization, the likelihood of war breaking out between the two would become an unacceptably high probability.

A nuclear Middle East combined with the asymmetric threat posed by proxy organizations, such as Hezbollah, would provide a recipe for disaster that could trigger outside intervention. One nation likely to intervene in such a conflict is Russia, which still holds sway­ throughout Southwest Asia and Eastern Europe.

According to the Baker Institute for Public Policy, European dependence on Russian LNG has left the continent at the mercy of Moscow’s influence. As it stands, Europe imports 34% of its natural gas from Russia.[5] In January 2009, gas supplies to all of Southeastern Europe were cut off as a result of a price dispute between Gazprom and Ukraine. In recent years, European leaders have found it difficult to object to Russia’s invasion of Georgia and to throw their support behind Viktor Yushchenko, the pro-Western Ukrainian President, for fear of Moscow’s disapproval. Consequently, it is likely Europe would look to an exporting U.S. as a reliable, non-threatening trading partner and shift its gas contracts from Russia to America.

Moreover, it is likely Europe would look to shift its gas contracts  for non-political reasons as well. Berzins, a Berlin-based Energy Consultant, notes there have  been several weather related disruptions to Europe’s imported supplies. In 2012, gas deliveries fell short “because of a weather-related surge in Russian demand.” The EU was only able to compensate for the shortfall by tapping into its strategic natural gas supplies and redirecting the fuel to areas with the largest demand. Thus, it is noteworthy that Cheniere Energy is already in talks with Lithuania to ship them LNG from the Sabine Pass.

If European dependence on Russian gas, offset by American shale, began to wane, it would have considerable geopolitical ramifications. First, Russia would lose most of its leverage over continental European powers, which could subsequently assist the Balkans and Eastern Europe in resisting Moscow’s clout. Second, an “energy-independent” Europe would be much more willing to support the U.S. in its global peacekeeping initiatives, without Russia’s blessing.[6] Such activities include the enforcement of the U.N.’s “Responsibility to Protect” doctrine in countries like Libya and Syria as well as the assistance of American counter-terrorism operations. Finally, stronger economic ties between the U.S. and Europe would help repair overall EU-U.S. relations, which have been damaged in the wake of the summer’s intelligence revelations.[7]

Though much has been made of the current transition from a unipolar to multipolar global order, natural gas exports may prove the catalyst that propels the U.S. ahead in the international rat race. Specifically, LNG would provide America with a valuable “energy weapon” that could be used to mitigate the influence of its “enemies” and deepen its engagement with its allies.

Note: The above is a longer version of an article I wrote for the Fall 2013 Print Edition of the Berkeley Political Review. The original is available via electronic access here.

[1]The natural gas revolution reversing LNG tanker trade,” Washington Post, December 7th 2012.

[3]The Geopolitical Implications of U.S. Natural Gas Exports,” American Security Project, March 2013. Nick Cunningham, Policy Analyst at the American Security Project.

[4]Shale Gas and U.S. National Security,” James A. Baker III Institute for Public Policy, July 2011. Kenneth B. Medlock III, Ph.D., Adjunct Professor in the Rice University Department of Economics, Head of the Baker Institute Energy Forum’s Natural Gas Program; Amy Myers Jaffe, Director of the Energy Forum at the Baker Institute; Peter R. Hartley, Ph.D., George and Cynthia Mitchell Chair of Economics at Rice University.

[5] The Geopolitical Implica­tions of U.S. Natural Gas Exports,” American Security Project, March 2013. Nick Cunningham, Policy Analyst at the American Security Project.

[6]Shale Gas and U.S. National Security,” James A. Baker III Institute for Public Policy, July 2011. Kenneth B. Medlock III, Ph.D., Adjunct Professor in the Rice University Department of Economics, Head of the Baker Institute Energy Forum’s Natural Gas Program; Amy Myers Jaffe, Director of the Energy Forum at the Baker Institute; Peter R. Hartley, Ph.D., George and Cynthia Mitchell Chair of Economics at Rice University.

[7]Has NSA spying put US-EU trade deal on the rocks?,” Christian Science Monitor, July 1st 2013. Sara Miller Llana, European Bureau Chief at the Christian Science Monitor.

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