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Energy Remapped: Yesterday’s Winners, Tomorrow’s Losers?

Geopolitics and geology have always been closely interlinked. Historically speaking, every international order is based on an energy resource. We moved from the Age of Sail to the Age of Coal and Steam—the latter the basis of the Pax Britannica. When the British literally ran out of steam, the Pax Americana emerged on the basis of oil, gas, and nuclear energy. Today the Chinese, hoping to usher in the age of the Pax Sinica, have been investing heavily in alternative energy resources. But just when China and others were writing off America as a declining power, the country finds itself on the cusp of achieving energy self-sufficiency. Will the shale revolution last long enough for Washington to rejuvenate itself and prolong American dominance of the international order? The doom and gloom that preceded the global financial meltdown in 2008 has certainly given way to an energy boom six years later. Soaring North American shale gas and oil, plus oil sands production and growing Asian dependence on the Middle East, are transforming global energy markets. The geopolitical ramifications could turn yesterday’s winners into tomorrow’s losers—and vice versa.

Global energy demand will rise by a third by 2035, according to the World Energy Outlook, led by the Indo-Pacific region. China will account for forty percent of the growth until 2025. And then India will overtake it, as demand for its energy outpaces the other BRIC countries as its growth rate climbs to one hundred and thirty-two percent (Brazil’s energy demand will grow by seventy-one percent and Russia’s by twenty percent). In the Middle East, consumption will soar because of booming economies and heavily subsidized prices. By 2030, China will import eighty percent of its oil, mostly from the Middle East. India will import ninety percent of its oil, also from the Middle East. Japan and South Korea will remain completely dependent on oil imports.

China has already surpassed the United States as the largest consumer of energy worldwide, heightening the geostrategic significance of routes for energy and trade shipments. Chinese leaders worry about vulnerabilities caused by their country’s growing foreign oil dependency. Beijing’s investments in ports along the Indian Ocean sea-lanes of communications are part of a maritime strategy that could result in the Chinese Navy patrolling the area in order to ensure the protection of oil tankers transporting supplies to China from the Middle East and Africa. Furthermore, the quest for seabed energy resources in part explains Beijing’s “paramilitary operations short of war” aimed at converting the East and South China Seas into a “Chinese lake.”

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Oil is bringing booming economies in East and South Asia closer to the Middle East, too close for comfort, according to some analysts, creating new tensions and frictions. Oil and gas prices in Asia remain much higher than in Europe or the United States, as China, Japan, and India, especially, engage in a frenetic treasure hunt for supplies. Energy insecurity feeds into geopolitical and structural rivalries in the region. Even if China and India increase their use of nuclear power, gas, and renewable fuels in their energy mix, oil will continue to supply their growing transportation and industrial sectors.

New alliances between consumers and producers are emerging. Saudi Arabia, Iraq, and Iran are looking for new partners in the East and finding them primarily in China and India. India’s relations with Russia, Iran, Africa, and Central Asia are mostly energy-motivated. India’s energy import bill may reach $300 billion by 2030, making its economy highly vulnerable to oil shocks and high prices. In fact, India is far more exposed to oil market fluctuations than other major emerging economies.

The energy competition is also heightening tensions over the long-dormant territorial/maritime disputes, and shaping defense modernization plans and forging new military alliances as geopolitical rivalries combine with mercantilism to create zero-sum games to gain control and outbid rivals.

 

Amid these dramatic, if somewhat under-publicized changes in energy consumption, a rebalancing of global oil production is under way. There is a shift in the global energy production away from traditional suppliers in the Middle East and Eurasia to Africa, South and Central America, Canada, and the United States. Canadian oil sands hold great potential, too, though they are not environment-friendly. Europe is steadily moving toward Norway, North Africa, Central Asia, and the Atlantic Ocean for energy supplies. The US dependence on the Middle East is declining sharply, thanks to domestic shale gas production and oil imports from Canada. New technologies and oil discoveries suggest that by 2020 the United States will not only become energy self-sufficient but also a net exporter of oil and gas, as the new technology of fracking, combined with horizontal drilling, increases the domestic oil flow and makes production profitable.

US shale oil production has zoomed from almost nothing to 0.9 million barrels per day (mbd) in 2010, and should more than triple to 2.9 mbd by 2020. Meanwhile, Canadian oil production from tar sands is rising fast and should surpass 3 mbd by 2020. If the US opens up its east and west coasts to drilling, oil production in the US and Canada could reach 22 mbd by 2020. Meanwhile, shale gas has risen from two percent of US natural gas production to thirty-seven percent over the last decade. The United States has overtaken Russia as the world’s largest natural gas producer. Some estimates show the United States overtaking Saudi Arabia as the world’s largest oil producer as early as 2017, starting to export more oil and gas than it imports by 2025, and achieving full energy self-sufficiency by 2030. The discoveries of American shale gas, when combined with Canadian oil sands and Brazil’s oil lying beneath salt beds, have the potential to make the Americas into the “new Middle East” of the twenty-first century, and to allow it to assume the role of a swing producer, helping to moderate the booms and busts of the global energy market.

Washington could leverage the US energy boom and remove domestic policy hurdles in order to expedite the export of natural gas to Asia both to enhance the energy security of its friends and allies there and to send a strong signal of US commitment to the region’s development. However, the depletion rate from shale gas and tight oil formations is much faster than that of conventional gas. Sure enough, nothing lasts forever. Some analysts also argue that the US oil bonanza may actually be in decline after 2020.

Australia, another long-term US ally, is also seen as an attractive place for tight oil and shale gas exploration. Australia may not have the seemingly bottomless development capital of China, or the powerful government incentives of Argentina, but, according to a report by Lux Research, a strategic adviser on emerging technologies, “Australia more than makes up for this by having the characteristics conducive to successful commercial production, which other front-runners like Argentina, China, [the] UK, and Poland lack. This includes existing infrastructure, low population density in key shale plays, and citizens who welcome resource extraction through its long mining legacy.” Chevron is leading the development of two liquefied natural gas (LNG) projects in Australia, at a cost of around $81 billion, that will liquefy and ship natural gas to energy-hungry Asian nations. Australia is also set to surpass Qatar as the largest global supplier of LNG.

Russia, which has used its vast energy resources to stage a comeback as world power, will continue to be a major player in the global energy game. (Its recent annexation of Crimea gives Moscow control of a large swath of the Black Sea, including deep oil reserves.) Moscow is the largest energy exporter in the world, and its economy remains extremely dependent on these sales. According to the European Bank for Reconstruction and Development, oil and natural gas now account for seventy percent of Russia’s exports and more than half of its government budget. In October 2013, China and Russia announced an $85 billion equity deal to jointly develop Russia’s east Siberian oil resources for export to China in an unprecedented agreement between the two countries. This was followed by Gazprom’s thirty-year $400 billion gas deal with China, announced in May 2014, which will diversify Russian energy export markets away from Europe, and make China Russia’s major ally despite Moscow’s geopolitical concerns about Chinese encroachments in Russia’s Far East and the loss of Central Asia to China’s growing influence. As a result, China, which was Russia’s fourth-largest oil export market in 2011, will become Moscow’s largest oil customer within five years.

Seeing Russia’s pivot to Asia as motivated by turbulence on the western front and coming from a position of relative weakness, Beijing’s game plan is to make Russia economically dependent on China in the same manner as the West has become addicted to cheap Chinese manufactured goods.

Moscow is only one piece of China’s energy puzzle. In recent years, Beijing has signed energy contracts worth hundreds of billions to increase Chinese access to the abundant petroleum resources of Central and Southwest Asia. In Central Asia alone, Chinese leaders have sought to forge closer trade and energy ties with Kazakhstan, Uzbekistan, Turkmenistan, and Kyrgyzstan to promote a “New Silk Road” of regional commerce (dubbed “Hydrocarbon Highway”) through various pipelines and railroads China has financed and built as part of its energy diversification strategy. However, importing oil from Russia and Central Asia will not meet China’s energy needs or reduce China’s dependence on maritime transportation of energy resources. Nearly eighty percent of China’s oil imports will continue to pass through the Strait of Malacca, a crucial maritime choke point.

Along with India, China is also eyeing Arctic energy resources. Although there are many downsides to the melting of polar ice caps, the upside is that the Arctic seabed and subsoil holds as much as a quarter of the world’s undiscovered oil and gas. But these discoveries will lead to new disputes and sour relations among nations. Russia claims that the Arctic seabed and Siberia are linked by one continental shelf, which gives it rights to the entire area north of Siberia extending up to the North Pole. But Beijing now calls itself the “next door neighbor” of the Arctic nations, and wants a share of the pie. Unlike the resources in the South China Sea, which it sees as exclusively its own, China’s Foreign Ministry spokespeople describe those in the Arctic as “the common wealth of humanity”—another indication that in future decades, the Arctic Ocean could become a hotbed of resource competition.

 

All of this energy maneuvering has profound geopolitical implications. The coming boom in the US, Canada, and Australia—if fully exploited—has the potential to change the dynamics among great powers, revitalize US alliances and redefine relationships between the traditional suppliers and consumers, and turn yesterday’s winners into tomorrow’s losers. Writing in Foreign Affairs, Robert Blackwill and Meghan O’Sullivan point out:

Global energy trade maps are already being redrawn as US imports continue to decline and exporters find new markets. Most West African oil, for example, now flows to Asia rather than to the United States. And as US production continues to increase, it will put downward pressure on global oil and gas prices, thereby diminishing the geopolitical leverage that some energy suppliers have wielded for decades. Most energy-producing states that lack diversified economies, such as Russia and the Gulf monarchies, will lose out, whereas energy consumers, such as China, India, and other Asian states, stand to gain.

Just as the Middle East is “moving east” and forging closer energy and strategic ties with China and India, Canada and the United States will be “looking west” to sell shale oil and gas to the energy-hungry economies of Japan, China, India, South Korea, and Southeast Asian nations. The availability of North American oil and gas would not only alleviate Asian economies’ concerns about energy scarcity but also enhance American diplomatic leverage. The United States could use its position as a swing producer to prevent energy price hikes caused by disruptions in traditional energy producers. Providing imports to economies in Asia and Europe that are dependent on imported energy would diversify their energy supply sources and allow the US to adopt a more robust stance on foreign policy issues in the Middle East and elsewhere.

China has seen the handwriting on the energy wall. Investments in the American and Canadian energy sectors by its national oil companies are estimated to be in the range of $30–35 billion. In 2012, China Investment Corporation invested in Cheniere Energy’s Sabine Pass LNG plant in the Gulf of Mexico, while state-owned China National Offshore Oil Corporation bought Nexen, a Canadian company that controls oil sands, for $15 billion. Beijing’s interest is both in diversifying its energy supplies and in gaining access to fracking technology to exploit its own shale gas reserves. In a similar vein, India’s national gas company, GAIL, and a major private energy firm, Reliance, have also stepped up investments in Canada and the United States, and India hopes to import shale gas and oil from North America.

A world oil market that includes the US and Canada would be more diversified and more stable for oil prices, and also reduce consumers’ over-dependence on the volatile Middle East, the OPEC cartel, and Vladimir Putin’s Russia. In other words, it will reduce the capacity of oil and gas exporters such as Russia or Iran to use energy exports as a political weapon. With the shale revolution in North America and greater output in Iraq likely to drive down energy costs in the years and decades ahead, Russian dependence on energy exports puts Moscow in a precarious position. Additionally, the growth of shale production in the United States will likely cause a drop in demand for Russian and Central Asian oil in the West. Russian oil exports to Europe are likely to fall as production in western Siberia and the Volga-Ural region decreases. As a result, Moscow is turning east for exploiting and exporting energy resources, but heavy dependence on the Chinese market could make Russia China’s junior partner and further diminish it as a world power, even as it keeps the gas pumping.

Furthermore, flow of North American oil into the world oil market will undermine OPEC’s ability to control prices. More supply means cheaper prices. Lower energy prices due to North America’s energy boom have the potential to undermine the stability of oil sheikhdoms in the Middle East and petro-regimes elsewhere “whose hefty oil revenues have allowed them to win their populations’ loyalties through patronage and a lack of taxation,” as the Foreign Affairs editors Benjamin Alter and Edward Fishman put it in an April 2013 New York Times op-ed. The United States may soon have less at stake in the Middle East than China, now the largest importer of Middle Eastern oil.

Even as the Gulf’s importance as an oil supplier declines, the United States will still have a geopolitical interest in the Middle East. The simple fact that its friends and allies in Asia remain hugely dependent on Middle Eastern oil will require Washington to stay engaged in the region. Should the US not do so, China would certainly expand its ties with energy producers and sign “oil-for-security” pacts in the region. Where China goes, Japan and India would follow, thus resulting in a scramble for Middle East influence and dominance among Asia’s regional powers. So, irrespective of its own energy fortunes, Washington will probably continue to uphold the post–World War II order that is essentially about “ensuring larger issues such as free markets, free flow of goods, including energy resources through secure sea lanes, and sustaining the political and security architecture,” in the words of energy expert Shebonti Ray Dadwal.

Finally, the integration of North American oil and shale gas with energy-hungry economies of the Indo-Pacific region (China, India, Japan, Korea, and ASEAN nations) will require major policy changes on oil and gas exports and substantial investments in energy export infrastructure, especially in the construction of pipelines, railroads, barges, and export terminals. Should the US invest in energy export infrastructure and adopt export-friendly policies, Washington could re-draw the global energy map and transform economic and geopolitical relationships in the vast Indo-Pacific region. In the end, while energy security or self-sufficiency is possible, energy independence is not because we are all part of one global oil market, and disruptions in any part of it will affect us all.

Mohan Malik is a professor of Asian security at the Asia-Pacific Center for Security Studies, in Honolulu. He is the editor of Maritime Security in the Indo-Pacific and the author of China and India: Great Power Rivals. This article is based on a paper presented at the Emerging Markets & Mounting Tensions conference last March. The views expressed are his own.

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