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The Geopolitical Implications of U.S. Shale as a Global Resource

25 October, 2013
Michael Zimmer and Elissa Welch

Introduction
The past decade has seen substantial change in the U.S. natural gas and oil industry. Since 2000, rapid growth in the production of natural gas, oil and liquids from shale formations in North America has dramatically altered the national and global energy market landscape. Shale energy is providing national economic and security benefits as the U.S. has raced to become the second largest global energy supplier. The U.S. produced an average of 6.41 million barrels per day in 2012, representing a 14% increase from 2011, according to the U.S. Energy Information Administration. This represents the largest annual gain in the number of barrels per day since the industry began in 1859 when Pennsylvania’s Drake well ignited the first American oil rush. Furthermore, the U.S. is expected to emerge as the largest producer of oil and gas this year surpassing Russia and Saudi Arabia.

Shale gas and oil constitute a new source of extractable energy for the post-industrial world. Countries that have considerable shale energy deposits (and those that are willing to drill for them) will be better positioned in the 21st century energy competition than those without such deposits. Similarly, shale gas will magnify the importance of geography in the U.S. and global markets. Countries that have shale deposits will help determine power relationships and alter the energy landscape that dominated the 20th century. “Because shale gas can be transported across oceans in liquid form, states with coastlines will have the advantage. The world will be smaller because of unconventional gas extraction technology, but that only increases the preciousness of geography,” according to Robert D. Kaplan, chief geopolitical analyst at Stratfor Global Intelligence. The same geographic importance holds true on the receiving end of liquefied natural gas (LNG) shipments, especially in regions such as Europe and Asia where energy imports will boost economic growth.

In order to capitalize on the full extent of its power as an expanding fuel source, natural gas and oil from shale must not be disadvantaged by government policies such as export limitations that protect competing fuels, such as coal or nuclear energy, while at the same time being sensitive to local community, environmental and water supply outcomes.

Expanding shale gas production in the United States is already impacting markets abroad. LNG supplies from the U.S. will be diverted to European and Asian buyers, presenting energy consumers in Europe with a supply alternative to the Russian pipeline as they plan ahead. It is also exerting pressure on the current practice of indexing gas sales to a premium marker determined by the price of global petroleum products. However, oil-linked prices are likely to dominate global LNG markets in the near term with growth in short-term or spot trading, as noted by Chloe Hang in the March 18, 2013 issue of Inside FERC. Because of this competition, Russia has begun accepting lower prices for its natural gas and is now allowing a portion of its sales in Europe to be indexed to spot natural gas markets, or regional market hubs, rather than global oil prices. This change in pricing terms signals a major paradigm shift for global energy economics, according to a report by the Baker Institute. Hang also notes that spot and short-term deals have risen from 13% of the LNG market in 2005 to 31% in 2012. Where the relative mix settles between short- and long-term may end up in balance because of pricing shifts yet to unfold.

In Asia, the formula in long-term contracts usually takes the form of a percentage of the crude oil price, plus a fixed differential. "It is a long run to go [before LNG prices de-link from oil prices]…” writes Hang. Asia will be a major market for U.S. LNG exports, reaching 40% of U.S. market share of Japan, China and Korea. A major displacement effect from U.S. LNG exports by 2028 will be seen in Australia, Thailand, China and Indonesia.

Shale developments in the United States are eliciting revelations about the possibility of technically and commercially viable shale gas resources in other areas around the world. Shale gas potential is being discussed in the United Kingdom, South Africa, Mexico, China, Argentina, India, Australia, Poland and elsewhere. Capital, technology, legal system infrastructure, geology and property ownership support will determine the timing of eventual international development, but for now, the U.S. will enjoy almost a decade’s head start over the global competition. The enormity of global shale gas potential will have significant geopolitical ramifications and exert a powerful influence on U.S. energy and foreign policy.

Geopolitical Impacts
The geopolitical repercussions of expanding domestic shale gas production include the following:

Increasing Domestic Supply
• Virtually eliminates U.S. requirements for imported LNG for at least 20 years.
• Lowers the global requirements for natural gas from geopolitically volatile regions.
• Opens U.S. export markets to Europe for coal, efficiency and clean tech products from U.S. manufacturers with proven results, offering export value to the European Union.
• Has already delivered large localized benefits to communities in the United States. Shale products have generated increased economic activity, developed a new tax base with increased revenues and broadened state prosperity. Even so, two-thirds of U.S. national shale potential still lies dormant in California. California stands a good chance of emerging as the nation’s top oil producer in the next decade, helping America towards what once seemed an unlikely goal of energy independence.

Supply Changes & Insecurity in Volatile Regions
• Increases the opportunities for support of continued economic sanctions against Iran. Iran will have trouble advancing the development of pipelines to India or Pakistan until at least the mid-2020s, thus reducing a potential source of political tension between the United States and India.
• Creates a shift from uncertain oil supplies to greater use of natural gas without fear of increasing the power of large natural gas resource holders such as Russia, Iran and Venezuela.
• Reduces the threat that a natural gas cartel can be formed, and it will trim the petro-power of energy producing countries such as Russia, Iran and Venezuela.
• Diminishes the opportunity for Venezuela to become a major LNG exporter and thereby lowers longer-term dependency on Venezuelan LNG in the Western Hemisphere, Latin America, the Caribbean and also Europe.
• Constrains and limits Iran’s ability to tap energy leverage as a means to strengthen its regional power or to buttress its nuclear aspirations in the Middle East.
• Provides volatile areas in the Middle East and North Africa with critical time to sort out current political and social turmoil before their importance as energy suppliers grows. (China will be slower to respond with its shale resources because of geology, infrastructure and water supply limitations, according to a recent article in the scientific journal Nature.)
• Compounds the declining use of Middle East oil, which will free up U.S. military resources for possible Asia duty as threats from China and North Korea rise.

Changing International Relationships
Reduces Russia’s market share in non-former Soviet Union Europe from 27% in 2009 to about 13% by 2040. This diminishes the chances that Moscow will be able to use energy for political gain in the EU, and forces Russia to seek new markets, incurring the associated pipeline and infrastructure costs.
• Reduces the future share of world gas supply from Russia, Iran, Qatar and Venezuela.  The Baker Institute report also notes that without shale energy discoveries, these nations would have accounted for about 33% of global gas supply in 2040, but with shale reserves now in play, these levels are reduced.
• Reduces U.S. and Chinese dependence on Middle East natural gas supplies, lowering the incentives for geopolitical and commercial competition between the two largest consuming countries. Both countries are provided with new opportunities to diversify their energy supply from alternative sources in a free market with potential pricing advantages.
• Provides an opportunity for Japanese economic development and post-Fukushima recovery with LNG trade if found by the U.S. Department of Energy to be in the public interest.

Conclusion
Shale energy will limit the need for expensive imports of LNG into the U.S., reducing the U.S. trade deficit and helping to strengthen the U.S. economy. Shale gas will also lower the cost expected to be incurred by average Americans from reducing greenhouse gas emissions as the country switches to cleaner fuels. Greater shale gas production will create greater competition among suppliers in global markets. Steady U.S. and international prices for natural gas will foster security of supply and pricing benefits to U.S. manufacturing. U.S. exports should keep prices stable for natural gas in the U.S., but not increase volatility by challenging the terms or prices of existing term contracts for suppliers, estimates Hang.

The United States must promote a stable investment and regulatory climate that reduces uncertainty and encourages investment and development. Shale-producing states are already putting the U.S. onto that track, and enjoying the added benefits of job creation, infrastructure development and improvements, and market creation. To continue this momentum, the United States will need to adopt policies that ensure shale gas development can proceed steadily and predictably with sound environmental oversight for the long term while also attracting capital, maintaining existing resources (or securing new resources) for manufacturing, and ensuring benefits to the local communities whose landscapes and economies are now the agents of global change.

Michael Zimmer is Executive in Residence at Consortium for Energy, Economics & the Environment at the Ohio University Voinovich School of Leadership and Public Affairs

Elissa Welch is Project Manager at Consortium for Energy, Economics & the Environment at the Ohio University Voinovich School of Leadership and Public Affairs

Additional Resources
Rice University’s James A. Baker III Institute Energy Forum and Harvard’s Geopolitics of Energy Project have launched a two-year study on the geopolitical implications of natural gas. For more information about the project, visit http://bakerinstitute.org/research/geopolitics-natural-gas/.

A study released in June by Belfer Center for Science and International Affairs at Harvard University found that the shale oil revolution taking place in the United States could make the U.S. the top oil producer in the world in just a few years. Read the study "The Shale Oil Boom: A U.S. Phenomenon" here.

Recent commentary by Center for Strategic and International Studies (CSIS) on “The Shifting Geopolitics of Natural Gas” can be accessed at http://csis.org/publication/shifting-geopolitics-natural-gas. CSIS is a bipartisan, nonprofit organization headquartered in Washington, D.C. founded in 1962.

ArticleClimate Diplomacy
Source
Topic
Energy

Region
Middle East & North Africa
Europe
North America

Topics

Adaptation & Resilience

All countries will need to adapt to some of the environmental, social and economic impacts of climate change that are already unavoidable. Food security, livelihoods, water resource availability and public health are some affected areas. People living in poverty are more vulnerable, having a lower capacity to adapt. Thus, it is essential to promote resilience building. The adaptation and resilience aspects need to be mainstreamed into planning by policy makers and the private sector as well as integrated into development strategies.

Biodiversity & Livelihoods

Nature protection is most sustainable if it essentially contributes to the long-term stability of human needs. Today many regions around the world are confronted with increasing destruction of the natural foundations of life. The consequences of wide-ranging resource destruction are no longer regionally limited, but rather represent a global threat. Those affected are mainly rural populations, who find the sources of their income and the foundations of their way of life swept away. The depletion and destruction of natural resources goes hand in hand with decreasing agricultural yields and increasing poverty, which in turn forces the affected populations to deplete the remaining resources.

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Capacity Building

On the one hand, conflicts are caused by structural factors, such as economic and social inequality or environmental destruction. On the other hand, conflicts are fuelled by a lack of democratic structures, deficient mechanisms of non-violent conflict settlement, inadequate rule of law, the destruction of social and cultural identity and the disregard of human rights. Against this backdrop, development policies have been dedicated to a broad concept of security, which comprises political, economic, ecological and social stability. As a consequence, development cooperation agencies and actors have developed a broad spectrum of approaches for conflict prevention and transformation as well as for sustainable use of natural resources.

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Cities

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Civil Society

Civil society is the first victim of environmental pollution, under-development and conflicts. Economically disadvantaged and politically marginalized population groups are particularly affected by violent conflicts as well as increasing resource degradation. Simultaneously, civil society is a fundamental pillar for implementing sustainable development. It contributes in many ways to strengthening conflict prevention and plays a significant role in the peaceful and democratic development of states. It must be supported to strengthen civil rights, adherence to human rights in general and democratic participation.

Climate Change

Climate change resulting from the emission of greenhouse gases represents one of the vital challenges for international environmental policy. Flooding, droughts, shifting of climate zones and increasingly frequent and intense extreme weather events will have serious economic and social consequences for entire regions. The climate problem is also directly linked to the question of future energy generation.

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Climate Diplomacy

To address the challenges posed by climate change, a new profile of climate diplomacy is evolving. This utilises a full range of policies, including development cooperation, conflict prevention efforts, and humanitarian assistance, in addition to more traditional measures of climate change adaptation and mitigation. Moving from a risk analysis of climate-related threats to well-timed preventive action requires a greater commitment to integrating climate change concerns into development, foreign, and security policies. Examples include strengthening diplomatic networks, building new alliances with partners, and raising awareness – not only of potentially negative climate change impacts, but also of opportunities to embark on a sustainable transformation of our societies.

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Co-Benefits

Climate action entails an array of economic, social, political and environmental co-benefits. It provides an opportunity for economic growth and new jobs. Many investments can take into account climate considerations without becoming more costly. Further important co-benefits include: improved energy security, less local air and water pollution, health benefits as well as ecosystem and biodiversity protection.

Conflict Transformation

In order to overcome the structural causes of violent conflicts and thus bring about an improvement in the framework conditions for peaceful and fair development, it is essential to have long term and broadly planned peace development and peace advancement. Various governmental and non-governmental, national and international actors and groups are involved in these processes.

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Development

Climate change and development are inextricably linked. Climate change endangers the development agenda and has the potential to reverse development goals. Furthermore, successful mitigation of climate change heavily depends on development choices around the world. Therefore, development strategies need to be climate-compatible to provide long-term success, and there are viable policy options that support this compatibility. Many mitigation and adaptation activities can present development opportunities to developing countries and avoid the lock-in to environmentally damaging technologies.

Early Warning & Risk Analysis

The reasons for the development and escalation of conflicts and the incidence of risks are multifaceted and complex. Simultaneously, the assessment of the specific causes in the form of risk and conflict analyses can contribute to a better understanding of these processes and make it possible to provide warning of negative developments, or ideally help prevent them. In the context of natural resource use, risks and conflicts have gained increasing attention in the past years. The debate on possible future water wars is merely one example.

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Energy

The well-being of individuals, communities and nations depends on the availability of energy resources. The gap between energy supply and demand appears to be growing, making the world vulnerable to serious economic shocks. At the same time, the burning of fossil fuels causing climate change is one of the vital challenges of international environmental policy. So far, only rudimentary approaches exist for shaping climate and energy security in a sustainable way. The components of a strategy that can contribute to reducing vulnerabilities related to climate change and energy policy include a greater role for renewable energies, the improvement of energy efficiency and a stronger decentralisation of energy supply.

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Environment & Migration

The economic, social and environmental consequences of climate change aggravate the breakdown of eco-system-dependent livelihoods and are likely to become dominant drivers of long-term migration. Natural disasters already cause massive shorter-term displacement and the number of temporarily displaced people is likely to further increase with climate change. For vulnerable populations in vulnerable regions, such as the Sahel zone or the Ganges delta, migration often becomes the sole survival strategy. In order to address climate-related displacement and migration successfully, knowledge of effective adaptation and an improved understanding of how environmental change affects human mobility is essential. 

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Finance

Climate finance, from all sources, plays a key role in supporting and enabling adaptation and mitigation action as well as climate and energy innovation. The Paris Agreement ensured that the Green Climate Fund and the Global Environment Facility are at the core of climate finance architecture as entities entrusted with the operation of the Financial Mechanism of the UNFCCC. Increasing climate finance from all relevant public and private sources is crucial. Furthermore, much needs to be done to redirect finance flows to sustainable paths, e.g. reducing fossil fuel subsidies, introducing maritime and air transportation taxes. The conditions for green investment in developing countries should also be improved.

Forests

Forests are disappearing at an alarming rate. Competition for forest resources triggers, exacerbates, or finances numerous crises and conflicts in tropical developing countries. Illegal logging and timber trade foster instability and sometimes violent conflict by strengthening illegal and armed groups, increasing corruption and exacerbating use and claim conflicts among local communities, the state and the business sector. Forests are a vital resource to poor people but they can also become areas of conflict. Sustainable management of forest resources is therefore key to preventing violent conflict over and within forests.

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Gender

Gender plays an important role as a category of conflict for many reasons. The interlinkages between gender, environment and conflicts are complex and much research is still needed. Existing insights suggest that conflicts may worsen gender inequalities that existed before the outbreak of violence. The unequal distribution of land property rights in many parts of the world serves as an example. Moreover, women (and children) are among those most affected by both violent conflict and natural disasters. At the same time, women carry much of the burden of trying to implement rehabilitation measures after crisis events.

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Land & Food

Increasing water scarcity, desertification and crop failures due to extreme weather events are becoming more and more of a threat to global food production. While the world’s population continues to grow rapidly, food production is unable to keep pace. Due to the global food crisis in 2008, the number of hungry people reached the symbolic one billion threshold for the first time – corresponding to about 16 percent of world population. Food insecurity may be a consequence or cause of conflicts. Violent conflicts often lead to the destruction of agricultural infrastructure and means of production, as well as to the displacement of local communities.

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Minerals & Mining

In the past, the discovery and tapping of valuable or strategic resources like valuable minerals, oil and natural gas, particularly in developing and emerging countries, has often led to large scale environmental contamination and negative development. The "resource curse" of some countries shows that the wealth from resource yields is frequently unfairly distributed; instead of serving development it advanced the formation of corrupt elites and in some cases even led to conflicts and civil wars. Measures in various sectors and at all levels are important in order to use the potential of these natural resources in a manner that is sustainable and prevents conflicts.

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Private Sector

The spread of violent conflict not only affects people but also companies located in such regions. Destruction of investments and infrastructure, collapse of markets and trade partnerships, flight and expulsion of employees are phenomena of conflicts and environment-induced crises that directly affect companies in unstable regions. Almost all branches of the economy thus have a clear interest in a stable and peaceful environment for their activities. Conversely, the business sector plays an important role in the interaction of economic growth, social development and a healthy environment, all of which can advance peace and sustainable development. 

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Security

Environmental issues have a significant security dimension. Access to, and overuse of, natural resources often play a key role in civil wars or other forms of internal domestic conflict. This is compounded by climate change and environmental degradation. Climate change is now widely recognised as a non-traditional, risk-multiplying threat that will have increasing security impacts. Key risks with possible implications for human and national security include water scarcity, food crises, natural disasters, and displacement. More preventive diplomacy and advocacy is needed to address the strategic implications of climate and environmental change.

Sustainable Transformation

Sustainable Transformation allows societies to profit from a growing, environmentally sustainable and socially inclusive economy – especially in emerging and developing countries. This requires a higher up-front investment, but the benefits of a sustainable transformation in the medium and long term are significant. For instance, energy cost savings and reducing the impact of price volatility offer major incentives for deploying renewable energies and promoting energy efficiency. Such benefits exist in all key sectors of the economy.

Technology & Innovation

Innovations and technologies are already readily available and affordable but their global diffusion and uptake remains a challenge. Innovation and technology are crucial to achieving ambitious climate change mitigation and adaptation targets. However, research and development often do not receive appropriate public support. Developing countries can leapfrog high-carbon industrialisation phases by adopting, deploying and improving existing innovations and technologies. For this, it is essential to minimise financial, administrative and political barriers.

Water

The availability of freshwater resources in sufficient quantity and quality is essential for the preservation of human health and sound ecosystems. The use of water resources is also vital, however, for economic development: whether for agriculture, industrial production or for electricity generation. The world's freshwater resources are distributed very unevenly in terms of geography and seasons. In addition, water shortage is becoming more prevalent in several regions due to population growth, economic development, urbanisation and increasing environmental pollution. Thus, water resources can hold potential for conflicts between parties who have different interests and needs.

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Regions

Asia

The environment in Asia is already under tremendous pressure as a result of the unsustainable use of land, forests, water and even air in many regions. Climate change will only exacerbate these challenges. Rising sea levels will likely endanger densely populated areas, changes in the monsoon patterns can strongly impact agriculture, melting glaciers will increase long-term water scarcity, and extreme weather events such as heavy rainfall and cyclones can pose further hazards.

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Central America & Caribbean

Natural disasters and water scarcity are key challenges for most of Central America and the Caribbean. These challenges will become even more pronounced as the climate changes. Weak resource and disaster risk management and land disputes pose additional security challenges for large parts of the region. Several countries of Central America and the Caribbean have limited adaptive capacities as they face political instability caused by high social inequality, crime, corruption, and intra-state conflicts.

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Europe

As one of the most developed and most densely populated regions in the world, Europe makes heavy use of its resources, resulting in difficult trade-offs and negative consequences for the environment and ecosystems. Land is used for settlements, agriculture and dense infrastructure, creating problems of soil degradation. Water resources are stressed due to unsustainable agricultural practices. Despite nature protection policies, Europe continues to lose biodiversity at an alarming pace. Some of these trends are exacerbated by climate change, which is expected, for instance, to lead to shifts in water availability.

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Global Issues

Resource scarcities, environmental pollution and climate change are not limited by national borders, but often have a transboundary or even global impact. These issues interact with political stability, governance structures and economic performance, and can trigger or worsen disputes and violent conflicts. Exacerbating some of these trends, climate change is likely to lead to the degradation of freshwater resources, declines in food production, increases in storm and flood disasters and environmentally induced migration. All these developments pose potential for conflict.

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Middle East & North Africa

The geopolitical position of the Middle East and North Africa (MENA), its fossil fuel resources, high population growth and the political changes spurred by the Arab Spring all make the region one of the most dynamic in the world. Nevertheless, it is also one of the most arid and environmentally stressed. Dwindling water resources, limited arable and grazing land, high pollution from household and industrial waste, remnants of conflicts and increasing desertification are key environmental challenges.

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North America

Climate change has various impacts on the three North American countries of Canada, Mexico and the US. Canada and the US have well-developed adaptive capacities and foster the strengthening of capacities in other regions as well. With high per capita emissions, these two countries also bear a greater responsibility for a changing climate. Mexico has a sound national strategy for climate change adaptation, yet fewer capacities than Canada and the US. The poorer and rural populations of Mexico are especially vulnerable to climate change, due to an increased sensitivity and a lower adaptive capacity.

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Oceania & Pacific

In Oceania, population growth and economic development trends put a strain on oceanic and island ecosystems. Freshwater scarcity, overexploitation of fisheries, loss of land biodiversity, forests and trees, invasive species, soil degradation, increasing levels of settlement, poor management of solid and hazardous waste and disproportionate use of coastal areas are some of the problems. Climate change exacerbates most of these trends, while also raising questions about the future sovereignty of some island states.

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South America

South America has diverse and unique ecosystems and is very rich in biodiversity. Weak natural resource management, land disputes and extreme weather events bring about significant challenges for the region. While South America accounts for relatively few CO2 emissions, the changing climate will alter its ecosystems and greater climate variability will lead to more hurricanes, landslides, and droughts.

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Sub-Saharan Africa

In many African states, environmental security issues rank high on the political agenda. Throughout the continent, countries suffer from water scarcity, food insecurity and energy poverty. These chronic and worsening resource scarcities have severe livelihood implications and are exacerbated by political conflicts over access to and control over these resources. Climate change may seriously threaten political and economic stability in Africa. It may also put a severe strain on the capacities of states and societies to co-ordinate activities, to communicate and to organize.

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