The Strategic Implications of American Energy Independence

Joseph V. Micallef is a best-selling military history and world affairs author, and keynote speaker. Follow him on Twitter @JosephVMicallef.

For the first half of the 20th century, the United States was both the largest producer of hydrocarbons and their largest exporter. After the 1950s, growing U.S. domestic consumption and declining American oil production eventually transformed the U.S. into the world's largest importer of petroleum.

The vulnerability of that position was driven home when, in October 1973, the Organization of Arab Oil Exporting Countries (OAPEC) declared an oil embargo against those nations supporting Israel during the Yom Kippur War.

OAPEC is a separate group from the Organization of Oil Exporting Countries (OPEC), although all the members of OAPEC are members of OPEC. It was OAPEC that orchestrated the 1973 oil embargo, not OPEC, as is generally believed.

The long-term U.S. response to the OAPEC oil embargo was to gradually shift the majority of its oil imports to Canada and Mexico, two countries that were politically more reliable and less likely to suspend oil exports to the United States. Paradoxically, as the U.S. became less directly dependent on oil imports from the Middle East, although many of its allies still remained dependent on Mideast supplies, it significantly expanded its engagement in Middle Eastern affairs.

The shift from the U.S. being the world's largest exporter of petroleum to the world's biggest importer was a significant event; one that had profound implications for U.S. foreign policy.

A second momentous event is now in the offing: The U.S. is poised to achieve energy independence and is rejoining the ranks of the world's largest energy exporters. This development will also have profound implications for U.S. foreign policy, especially U.S. foreign policy in the Middle East, and Washington's relationship with Moscow.

The Road to American Energy Independence

During the second half of the 20th century, it was widely accepted that U.S. energy production was destined for an inevitable decline. Most of the hydroelectric dams that could be built had already been constructed. The few potential sites that remained were politically and environmentally controversial and faced stiff political opposition.

Likewise, the U.S. was considered, in the parlance of the oil industry, "a mature oil exploration province." Most of the readily accessible oil fields had been found. What remained were in technologically difficult environments such as the high Arctic or ever deeper offshore deposits in the Gulf of Mexico. Foreign oil fields were more promising, but access to most of these were either tightly controlled by foreign governments or came with significant political risk of expropriation.

"Peak oil," the point in time when the world's oil reserves would inevitably peak and begin their inexorable decline, was the prevailing paradigm of discussion among energy experts. As little as a decade ago, Goldman Sachs, one of Wall Street's leading investment banks, could confidently predict that $200 per barrel oil was fast approaching.

The reality proved to be far different. Technical advances in horizontal drilling and improvements in the technology of hydraulic fracturing or "fracking" opened up vast new deposits of oil and gas. These reservoirs had previously been dismissed as uneconomic, because the hydrocarbon bearing formations were considered "tight" and would not yield economic quantities of oil and gas from vertically drilled wells.

Horizontal drilling and fracking transformed these previously uneconomic deposits and triggered a 21st-century American hydrocarbon boom. Initially, many of these deposits were expensive to develop and only made sense in an environment of high energy prices, usually $50 or more per barrel of oil. Production costs have steadily come down, however, and many producers can now operate profitably even if prices drop to $30 per barrel.

In 2011, the year that the U.S. again became an exporter of petroleum, the U.S. energy trade deficit peaked at $321 billion. Since then, that deficit has steadily declined. In 2017, the energy trade deficit was around $55 billion. That deficit is expected to be completely erased by 2022. Within the next decade, that deficit will likely be replaced by an equally sized surplus. The surplus represents a swing of around $650 billion dollars in the U.S. energy trade deficit between the last decade and the next.

In 2017, the U.S. trade deficit reached a record level of $566 billion, roughly 10 percent of which was energy related. Within a decade, rising oil and gas exports could cut that deficit by more than half.

In 2018, U.S. petroleum exports will average around 2.2 million barrels of oil per day (BOPD). This level compares to virtually nothing in exports as little as eight years ago. This level of oil exports is roughly equivalent to Iran's oil exports. In other words, in roughly seven years, the U.S. has brought on an oil export capacity that can replace Iran's export sales.

The real driver of the growing U.S. energy exports, however, is natural gas. In 2018, the U.S. will become a net exporter of liquefied natural gas (LNG). This means the U.S. will export more natural gas than it imports.

The U.S. has huge reserves of natural gas, and these are being augmented substantially by the "fracking boom." Currently, the U.S. has approximately 340 trillion cubic feet (TCF) of proven natural gas reserves, roughly a 100-year supply.

In addition, the U.S. Geological Survey has estimated that there are an additional 600 TCF of unproven natural gas that are economically recoverable. In other words, the U.S. has plenty of gas, most of which is relatively easy to get to and, by world standards, relatively inexpensive to produce.

By comparison, proven Russian reserves, one of the world largest natural gas exporters, are about 45 TCF. Although it's likely that Russia has additional unproven gas reserves, many of these are in remote Siberia or Russia's inhospitable Arctic. Bringing this gas to market will likely prove to be expensive.

More importantly, advances in the liquefaction and transport of natural gas mean that it is now feasible to ship natural gas anywhere in the world.

To export natural gas, it must first be supercooled in specially constructed gas liquefaction plants to a negative 260 degrees Fahrenheit until it becomes a liquid. It is then transported in LNG tankers, which can maintain it in a liquid state. At its destination, the liquid natural gas is converted back into a gas and distributed via the existing gas pipeline infrastructure.

Currently, the U.S. has an export capacity of around 5 billion cubic feet (BCF) of natural gas a day. There is more than 44 BCF of capacity across 26 facilities, either under construction, already permitted by the U.S. Federal Energy Regulatory Commission or awaiting approval. To put this number in perspective, Russia's current natural gas export capacity to Europe is approximately 20 BCF per day. An export capacity of 44 BCF is equivalent to 75 percent of China's or Europe's expected natural gas consumption by 2040.

In addition, the fleet of LNG tankers is growing quickly. Currently, 65 ships are under construction, adding 360 million cubic feet of capacity. That's the equivalent of roughly 9.5 TCF of yearly natural gas exports.

By 2020, the U.S. will be at least the fourth largest exporter of natural gas in the world, behind only Russia, Australia and Qatar, and will likely overtake them later in that decade.

Energy Independence and U.S. Foreign Policy

The prospect of the U.S. emerging as a major exporter of energy will have far-ranging implications for both the U.S. economy and its foreign policy. Economically, it will eliminate a major source of the U.S. trade deficit, while as the energy trade shifts to a net positive, the surplus will eventually offset at least half of the current U.S. trade deficit.

More importantly, natural gas is an important feedstock for a range of petrochemical-related industries -- from plastics to fertilizers. Inexpensive and plentiful natural gas is feeding a boom in export sales of petrochemicals and their related products. Moreover, energy costs are a significant component of manufacturing costs in many industries. Inexpensive energy is a significant contributor to the competitivity of American industry.

Far more importantly, however, are the implications for Russia's gas exports to Europe. Russia currently supplies about 40 percent of the EU's natural gas needs. More importantly, Russia has increasingly emerged as the swing supplier as Europe's natural gas consumption has grown. The Kremlin has seen Europe's growing dependence on Russian natural gas as an important source of leverage in Moscow's relations with the various European states and, in particular, Germany.

This dependence is especially true with respect to the former states of the USSR and some of the former countries in the Soviet bloc. In the Baltic republics of Estonia, Latvia and Lithuania, for example, dependence on Russian energy has been almost 100 percent. LNG, however, is rapidly changing that.

Lithuania now has an import terminal allowing it to bring in LNG from Norway and soon from the U.S., as well. Latvia and Estonia are linking up their domestic gas distribution system to that of Lithuania in order to avail themselves of LNG imports via Lithuania.

Poland is moving in the same direction, having recently signed an agreement with two U.S. companies to import 3.5 TCF of natural gas over 20 years. Polish state-run gas company PGNiG has already announced that it plans to stop importing Russian gas after 2022.

At the moment, Russian gas to Europe is about 15 percent cheaper than equivalent American LNG imports. Russia has the advantage of moving most of its natural gas exports to Europe via an established network of pipelines, which have long since been paid off.

It's believed, however, that gas delivered via new pipelines, such as the Nord Stream pipelines and the South Stream and Blue Stream pipelines, will be more expensive. Moreover, even if Europe does not become a significant market for U.S. LNG exports, the availability of U.S. supplies will significantly reduce Russian pricing leverage, as well as the political leverage that Europe's dependence on Russian gas has afforded the Kremlin.

In Asia, much the same scenario is true, except here U.S. LNG exports enjoy a significant price advantage. Natural gas delivered to China via Russia's new Asian gas pipeline runs around $10 per MCF versus around $4.50 per MCF for American LNG. Russian gas reserves in eastern Siberia are more expensive to operate, and the pipeline to carry that gas to China is brand new and was expensive to build.

Chinese imports of American LNG could go a long way to reducing the U.S. trade deficit with China, a persistent source of friction between Washington and Beijing. In addition, they would go a long way to reducing Japan's and South Korea's vulnerability to supply disruptions from Mideast sources.

Not surprisingly, the Trump administration has criticized Europe's dependence on Russian gas exports and has been promoting American LNG as an alternative. It's conceivable that the question of American LNG exports to Europe will become strategically linked by Washington to European commitments to increase their level of defense spending to 3 percent of their gross national products (GNP).

In other words, the Trump administration might show more flexibility on NATO's pledge to spend 3 percent of GNP on defense spending in return for a larger commitment to purchase American LNG.

Simply put, the use of Russian natural gas exports as a source of political leverage in Russian foreign policy has probably seen its best days. Going forward, it's likely that the Kremlin's gas-based leverage will decline substantially.

The implications of American energy independence on U.S. foreign policy in the Middle East are unclear. The region is awash in oil and gas and will continue to remain a significant producer. Outside of Qatar, OPEC is not a major exporter of natural gas. Moreover, even with its substantial natural gas reserves, the region's gas distribution infrastructure is poorly developed.

Paradoxically, notwithstanding the substantial natural gas reserves in the region, the U.S. has been exporting LNG to a number of Middle Eastern countries, including Egypt, Jordan and even Kuwait, a substantial oil and gas producer in its own right.

U.S. exports of petroleum will remain modest compared to exports from Persian Gulf producers. Still, rising American production will function to diminish OPEC's pricing power. At 2.2 million BOPD, the U.S. has already replaced Iranian oil output. As a result, Tehran's oil sales are far less irrelevant to global oil markets and the declines in oil exports have been far less impactful on global oil prices than would previously have been the case.

American oil exports are expected to more than double over the next decade or so, making the U.S. a significant competitor to Mideast oil producers and to OPEC in world energy markets. That may make the U.S. far more willing to disengage from Middle Eastern affairs and to substantially cut back on its military footprint in the area. Whatever the result, OPEC's oil-related leverage is quickly dissipating.

U.S. energy independence will likely have an impact on Mexico and Canada as well. This is particularly true of Canada, which has historically sold the bulk of its oil and gas to the United States. More importantly, Canada has depended on oil and gas exports to balance its trade deficit with the U.S. Declining U.S. demand for Canadian oil and gas may have serious consequences for Canada's economy, especially since proposals to build oil and gas pipelines to supply Asian export markets have been mired in political controversy.

U.S. energy independence is going to be a game changer in international affairs and will have far-ranging consequences. It will drive a reorientation of U.S. foreign policy as profound as that driven by American dependence on foreign oil in the second half of the 20th century.

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