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Shale Gas and the Global Political Economy

Shale gas officially became a global issue in 2011 and 2012, even though as early as 2008, shale gas was restructuring the whole energy system of the United States.

Indeed, the price of West Texas Intermediate Crude Oil went below that of Brent Crude Oil or Dubai’s, the latest manifestation of plummeting natural gas prices. This is an unprecedented change in the energy industry.

Data from NASDAQ.com U.S. National Average Natural Gas price 02/27/2014

Data from NASDAQ.com
U.S. National Average Natural Gas price

Data from NASDAQ.com Top: Brent Crude Oil price Bottom: West Texas Intermediate Oil price 02/27/2014

Data from NASDAQ.com
Top: Brent Crude Oil price
Bottom: West Texas Intermediate Oil price

There are four major changes happening in the United States due to shale gas and shale oil:

  1. Many of the factories that firms like GM and Nike own overseas are coming back to the U.S., especially the ones in China.
  2. The U.S. manufacturing industry is being revitalized.
  3. The U.S. petrochemical industry is being revitalized.
  4. The United States is becoming an energy-exporting country.

So far, the United States has been the biggest energy-importer in the world. At the same time, the country is on pace to be a bigger exporter of energy than Saudi Arabia by 2025. It implies a fundamental change that will lead the U.S. net export to be positive. These are the changes in the basic economic circumstances of the U.S.

Data from Federal Reserve Bank of St. Louis

Data from Federal Reserve Bank of St. Louis

Since the 1970s, the U.S.’s oil exports have been banned with exceptions to some countries including Canada and those that signed FTAs with the U.S. Then, in December 2013 came the suggestion to reconsider the nation’s ban on oil exports.

So what do these changes mean?

A notable fact is that there are two major ways of producing energy in the petrochemical industry: production from naphtha (petroleum crude) and production from ethane (natural gas). Natural gas is much more competitive than petroleum crude, making the U.S.’s petrochemical industry stronger.

Consequently, the U.S. trade deficit has been decreasing quickly as the graph shows. The fact that the U.S. can earn money overseas means that the US dollars out in the world are being sucked back into the U.S. That process will subsequently make the USD extremely strong and depreciate developing countries’ wealth at a rate that is incomparable to the tapering the Fed talks about.

Another result of the U.S. becoming the world’s biggest energy exporter is the devaluation of the Middle East as a strategically valuable region. One of the reasons why the Middle East has been in constant conflict in the 20th century is the struggle to claim the region’s natural resource after discovery of petroleum in the region in the 1920s. But now, the strategic value of the Middle East will be depreciated.

The Effect on the Middle East

Last month, the United Arab Emirates (UAE), a member of OPEC and the eighth largest producer of crude oil, decided to import U.S.’s shale gas. While the superficial reason for the imports is “to meet its domestic energy demands, whilst reserving the more expensive crude oil for selling on the market,” it doesn’t seem to be the only message it delivers.

An implicit message behind this decision is that the UAE is a country that buys a U.S. product. It is a highly political move to have the United States as the big brother.

This move from the UAE, then, may make Israel less valuable to the U.S. Since Israel has played the American wedge in the Middle East, the potential change in Israel’s value to the U.S. suggests reorganization of the politico-militaristic geography of the Middle East as a whole.

On China

There is also a possibility of China’s becoming the largest importer of US energy.

According to the recent report by the U.S. Energy Information Administration, China is “projected to move from second-largest net importer of oil to the largest in 2014” and the “robust growth in natural gas demand in recent years…has led China to become the third largest LNG (liquefied natural gas) importer.”

If China does not adjust its energy policies to the new prices and keeps its reliance on the Middle East, it will fail to be competitive due to the huge price disadvantage. Since cheap energy costs is as important as cheap labor costs, the U.S. firms that invested in China would have to come back home, forcing China to play a role in the new and cheaper energy system. In this case, the global political geography changes: G2 would not exist anymore.

On Japan

The U.S. Energy Department on February 11 approved exports from Sempra Energy’s Cameron LNG project in Louisiana. As the Reuters reported, “the conditional approval of exports from the terminal to countries with which the United States does not have FTAs,” such as Japan was “the sixth approval by the department since 2011.”

The Cameron project aims to start exporting 12 million tons of LNG per year in 2017. There is a reason behind Japan’s such move as well. Since Japan, the nation of traditional trade surplus, has faced the problem of swelling trade deficit after the Fukushima Accident, Japan really had no choice but to import the cheap LNG from North America.

However, there is another behind-the-obvious reason: securing a safe trade route. Abe Shinzo’s Japan has been seeking a way to justify strengthening its military power, as its constitution currently prohibits its army from growing. Indeed, Article 9 of Japan’s Constitution states that “land, sea, and air forces, as well as other war potential, will never be maintained.”

With the new trade route to and from North America, Japan will utilize it to justify strengthening its “navy” or the Maritime Self-Defense Forces.

On the United States

With this extraordinary growth in shale gas industry and the soaring exports, the U.S. trade structure will eventually change. In other words, the U.S. may be the country that lives on the prosperity of energy exports. Just as the Netherlands and England did, the U.S. may experience the “energy disease.” With more wealth on its back, politicians will uphold more populist policies that impede the nation’s economic growth.

About Thomas Kim

Thomas is a sophomore from Korea, studying Mathematical Methods in the Social Sciences (MMSS) and Economics at Northwestern.

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