by Richard Engel and Robert Windrem, NBC News
WITHOUT fanfare, China passed the United States in December to become the world’s leading importer of oil – the first time in nearly 40 years that the U.S. didn’t own that dubious distinction. That same month, North Dakota, Ohio and Pennsylvania together produced 1.5 million barrels of oil a day — more than Iran exported.
As those data points demonstrate, a dramatic shift is occurring in how energy is being produced and consumed around the world – one that could lead to far-reaching changes in the geopolitical order.
U.S. policy makers, intelligence analysts and other experts are beginning to grapple with the ramifications of such a change, which could bring with it both great benefits for the U.S. and potentially dangerous consequences, including the risk of upheaval in countries and regions heavily dependent on oil exports.
But many experts say the U.S. would be the big winner, in position to reshape its foreign policy and boost its global influence.
“People already are looking at the U.S. differently, seeing the U.S. as much more competitive in the world,” said energy analyst and author Dan Yergin, saying that he first noticed the change in the world view of the U.S. at the World Economic Forum in January in Davos, Switzerland.
As detailed in the first two installments of Power Shift, an NBC News/CNBC special report, the United States is reaping the benefits of an energy boom created by new drilling technologies that have unlocked vast domestic oil and natural gas reserves. Coupled with decreasing demand due to energy efficiency and continued cultivation of alternative energy sources, an increasing number of experts believe the U.S. could achieve energy independence by the end of the decade – realizing a dream born during the gas crisis of 1973.
But who would be the global winners and losers in such a scenario?
Most U.S. policy makers and experts agree that the U.S. and its allies – particularly its North American neighbors — would be the biggest beneficiaries.
Boom helps Iran sanctions stick
In fact, they say, the West already has realized one major benefit: the success of international sanctions against Iran over its nuclear program.
Carlos Pascual, the State Department’s coordinator for international energy affairs, noted last month at the CERAWEEK energy conference in Houston that increased U.S. oil production, coupled with a boost in exports from Iraq and Libya, has kept oil prices stable despite the loss, because of sanctions, of up to 1.5 million barrels a day in Iranian exports.
“What this has taught us, and helped underscore, is that within the world we live in today, hard security issues and energy policy issues have become fundamentally intertwined,” he said.
Yergin, who also is a CNBC energy consultant and author of the energy-focused nonfiction best-sellers “The Quest” and “The Prize,” put it this way: “People talk of the future impact. The increase in U.S oil production has already had an impact: Sanctions wouldn’t have been effective without U.S. oil production. … We’ve added (within the last year) almost as much as Iran was exporting before sanctions.”
Hossein Moussavian, a former Iranian ambassador to Germany and nuclear negotiator who’s now a fellow at the Woodrow Wilson School at Princeton University, said “the radicals” in Tehran failed to foresee the changing energy picture, believing that sanctions wouldn’t be imposed and that, if they were, they wouldn’t work because oil prices would surge.
“The Iranian mistake was to believe … the threats of referring Iran to the United Nations Security Council, imposing sanctions, was just a bluff,” he said.
In the longer term, observers say that the Organization of Petroleum Exporting Countries (OPEC) and many of its member nations are likely to be the biggest losers if the U.S. continues to cut oil imports, likely decreasing oil prices in the process.
“A dramatic expansion of U.S. production could … push global spare capacity to exceed 8 million barrels per day, at which point OPEC could lose price control and crude oil prices would drop, possibly sharply,” the U.S. intelligence community’s internal think tank, the National Intelligence Council, said in its “Global Trends 2030” report in December. “Such a drop would take a heavy toll on many energy producers who are increasingly dependent on relatively high energy prices to balance their budgets.”
With some analysts predicting that oil prices could drop as low as $70 to $90 a barrel – down from the current price of nearly $110 per barrel of Brent crude oil – a “scramble” among OPEC members for market share could ensue, said Edward Morse, an energy analyst with Citigroup and co-author of a recent report on titled “Energy 2020: Independence Day.”
An International Monetary Fund analysis indicates that many major oil-producing states need more than that lowest price level to meet their budgets and would be forced to increase output or reduce spending, which could trigger unrest. Among them, according to the report: Iran, Libya and Russia, at $117 a barrel; Iraq, $112; Yemen, $237; and the UAE, $84.
Iraq, which has had production from its rich oil fields curtailed by war or sanctions for half of the 53 years of OPEC’s existence, poses another challenge to the organization.
Now that it’s finally free of such interference, its production is increasing by between 500,000 and 900,000 barrels a year, making it the second fastest growing oil-producing country in the world after the U.S.
“And, by God, no one’s going to impose any quota limitations on them,” said Morse, referring to Iraq’s OPEC partners. “So part of the challenge to OPEC is internal as well as external.”
Can Saudis maintain market-maker role?
Analysts say OPEC heavyweight Saudi Arabia, which controls vast reserves of oil and needs $71 a barrel to meet its budget, according to the IMF, will do everything it can to remain the market-maker. But in that role, it will face new challenges, they say.
“Over time, it should become increasingly challenging for Saudi Arabia to ‘overproduce’ and bring down prices to punish wayward OPEC members; without this disciplinary mechanism, it is unclear whether OPEC can remain cohesive,” according to the Citigroup report.
For its part, OPEC professes to be not unduly alarmed by the U.S. oil and natural gas boom. It highlights the “considerable uncertainties” surrounding wells drilled using hydraulic fracturing, or “fracking,” and associated technologies.
Yergin said he believes that the Saudis will be able to withstand the turbulence, and that they will provide a buffer for the organization’s lesser producers.
“It’s too quick to write the obit for OPEC,” he said. “… The Saudis will figure it out. They are re-orientated to Asian markets, turning left instead of right.”
But some members of the oil cartel — particularly Nigeria and Angola — already are feeling the impact of the U.S. production surge, according to the Citigroup report. U.S. imports from the two countries dropped to 700,000 barrels a day at the end of 2012, down from 1.6 million barrels in 2007. That’s because U.S. production of light, sweet crude — the kind of oil the West African nations produce — has burgeoned in recent years. Citigroup forecasts that by the end of 2013, the market for Nigerian oil at Gulf Coast refineries could entirely dry up.
Longer term, s
ay by 2020, cheaper heavy oil from Canada, freed from the so-called oil sands by new recovery technologies, could push similar oil from Venezuela out of the U.S. Gulf Coast market, (assuming the Obama administration approves construction of the Keystone XL pipeline to carry it), according to forecasts.
Mexico also is expected to increase production, offering the U.S. access to another convenient and friendly provider.
“The Eagle Ford formation in Texas extends into Mexico and if you look at the Gulf, you’ll see thousands of black dots marking oil platforms on the U.S. side but nothing on the Mexican side,” said Yergin. “That’s changing. There is a political consensus among the three major parties on energy. You will see less immigration from Mexico. Mexico could become more of a BRIC (the term used for fast-developing economies like Brazil, Russia, India and China) than Brazil.”
Besides guaranteeing a stable domestic energy supply, those energy resources add tools to the U.S. diplomatic toolbox, said David L. Phillips, director of the Peace-building and Human Rights Program at Columbia University.
“Why permit ourselves to be held hostage to regimes hostile to our national interests and who give safe harbor to those who would do us harm?” he asked. “… The glaring example is Venezuela. (Hugo) Chavez was so strongly anti-American and he was providing energy to our enemies. They should pay the price for non-cooperation.”
Current and former diplomats note that the U.S. also could use its increased natural gas production to weaken rival Russia’s near monopoly on natural gas exports to Europe, via its state-controlled energy giant Gazprom. Already, declining prices fueled by the U.S. boom have benefited the European market.
“What has emerged is a competitive market that allowed the utilities of Western Europe to renegotiate their contract with Gazprom, affecting both prices and financing terms,” said the State Department’s Pascual.
Adding to the pressure, the U.S. firm Cheniere Energy last month signed a 20-year deal to export enough liquefied natural gas to the British utility Centrica PLC to heat 1.8 million homes starting in 2018 – the first pact of its kind.
Growth slowing in China, India
As for China and India, both of which are expected to import increasing amounts of energy for years to come, analysts see indications that economic growth is slowing in both countries.
“In a pattern similar to the abrupt slowdown in demand growth seen in the Asian Tigers in the 1990s, Chinese demand growth has slowed to a more tepid 3 (percent) to 5 percent rate as compared to the double-digit growth seen in the early 2000s,” said a Citigroup report by analyst Seth Kleinman released last week.
That slowdown is in part due to the diminishing competitive edge that China enjoys over the U.S., Yergin said.
“Chinese wages are going up 20 percent a year. U.S. energy efficiency and increased production helps the U.S. in the mix on the global competitive landscape, he said, noting that Dow Chemical recently announced it will invest $4 billion in U.S. petrochemical production. “…That doesn’t happen without the U.S. advantage in energy.”
Citigroup’s Morse and other analysts said the slowing Chinese economy and energy insecurity could prompt China to more militarization in the Far East — a dangerous development in a region already beset by nationalist disputes and where the U.S. is expected to focus increasing attention. But none suggests that the Chinese are likely to challenge the United States as a global power, saying Beijing has neither the military assets nor the desire. Its strategy remains regional and attuned to “short-range engagements,” Morse wrote.
The impact of the rebalancing of global energy production could be more severe in other nations.
Trevor Houser, a former energy analyst in the Obama administration State Department, worries about the prospect of failed states.
“If you look at the consequences of more U.S. production and reduced sales from OPEC, some would see that as a benefit,” said Houser, now a partner with New York-based Rhodium Group, a global market analysis firm. “But starving those economies of oil revenue will surely have disruptive effects. It is definitely not a good development for U.S. foreign policy and geopolitical stability in general.”
Houser also said that U.S. energy independence could lead to isolationist policies, but will not insulate Americans from global price disruptions.
“The price Americans pay at the pump will still be determined by events in the global oil market, yet falling U.S. oil imports (are) going to reduce political support for safeguarding those global markets, and no one is willing or able to step up to the plate to replace us,” he said. “… The U.S. economy will still be vulnerable if someone blows up a Saudi pipeline.”