Friday, November 28, 2014

Energy Independence in an Interdependent World

CAMBRIDGE – When President Richard Nixon proclaimed in the early 1970’s that he wanted to secure national energy independence, the United States imported a quarter of its oil. By the decade’s end, after an Arab oil embargo and the Iranian Revolution, domestic production was in decline, Americans were importing half their petroleum needs at 15 times the price, and it was widely believed that the country was running out of natural gas.

Energy shocks contributed to a lethal combination of stagnant economic growth and inflation, and every US president since Nixon likewise has proclaimed energy independence as a goal. But few people took those promises seriously.

Today, energy experts no longer scoff. By the end of this decade, according to the US Energy Information Administration, nearly half of the crude oil that America consumes will be produced at home, while 82% will come from the US side of the Atlantic. Philip Verleger, a respected energy analyst, argues that, by 2023, the 50th anniversary of Nixon’s “Project Independence,” the US will be energy independent in the sense that it will export more energy than it imports.

Verleger argues that energy independence “could make this the New American Century by creating an economic environment where the United States enjoys access to energy supplies at much lower cost than other parts of the world.” Already, Europeans and Asians pay 4-6 times more for their natural gas than Americans do.

What happened? The technology of horizontal drilling and hydraulic fracturing, by which shale and other tight rock formations at great depths are bombarded with water and chemicals, has released major new supplies of both natural gas and oil. America’s shale-gas industry grew by 45% annually from 2005 to 2010, and the share of shale gas in America’s overall gas production grew from 4% to 24%.

The US is estimated to have enough gas to sustain its current rate of production for more than a century. While many other countries also have considerable shale-gas potential, problems abound, including water scarcity in China, investment security in Argentina, and environmental restrictions in several European countries.

The American economy will benefit in myriad ways from its change in energy supply. Hundreds of thousands of jobs are already being created, some in remote, previously stagnating regions. This additional economic activity will boost overall GDP growth, yielding significant new fiscal revenues. In addition, the lower energy-import bill will cause America’s trade deficit to narrow and its balance-of-payments position to improve. Some US industries, such as chemicals and plastics, will gain a significant comparative advantage in production costs.

Indeed, the International Energy Agency estimates that the additional precautions needed to ensure shale-gas wells’ environmental safety – including careful attention to seismic conditions, properly sealed shafts, and appropriate waste-water management – add only about 7% to the cost.

With respect to climate change, however, the effects of greater reliance on shale gas are mixed. Because natural-gas combustion produces fewer greenhouse gases than other hydrocarbons, such as coal or oil, it can be a bridge to a less carbon-intensive future. But the low price of gas will impede the development of renewable energy sources unless accompanied by subsidies or carbon taxes.

At this stage, one can only speculate about the geopolitical effects. Clearly, the strengthening of the US economy would enhance American economic power – a scenario that runs counter to the current fashion of portraying the US as being in decline.

But one should not jump to conclusions. A balance of energy imports and exports is only a first approximation of independence. As I argue in my book The Future of Power, global interdependence involves both sensitivity and vulnerability. The US may be less vulnerable in the long run if it imports less energy, but oil is a fungible commodity, and the US economy will remain sensitive to shocks from sudden changes in world prices.

In other words, a revolution in Saudi Arabia or a blockade of the Strait of Hormuz could still inflict damage on the US and its allies. So, even if America had no other interests in the Middle East, such as Israel or nuclear non-proliferation, a balance of energy imports and exports would be unlikely to free the US from military expenditures – which some experts estimate run to $50 billion per year – to protect oil routes in the region.

At the same time, America’s bargaining position in world politics should be enhanced. Power arises from asymmetries in interdependence. You and I may depend on each other, but if I depend on you less than you do on me, my bargaining power is increased.

For decades, the US and Saudi Arabia have had a balance of asymmetries in which we depended on them as the swing producer of oil, and they depended on us for ultimate military security. Now the bargains will be struck on somewhat better terms from America’s point of view.

Likewise, Russia has enjoyed leverage over Europe and its small neighbors through its control of natural gas supplies and pipelines. As North America becomes self-sufficient in gas, more from various other regions will be freed up to provide alternative sources for Europe, thereby diminishing Russia’s leverage.

In East Asia, which has become the focus of US foreign policy, China will find itself increasingly dependent on Middle Eastern oil. American efforts to persuade China to play a greater role in regional security arrangements may be strengthened, and China’s awareness of the vulnerability of its supply routes to US naval disruption in the unlikely event of conflict could also have a subtle effect on each side’s bargaining power.

A balance of energy imports and exports does not produce pure independence, but it does alter the power relations involved in energy interdependence. Nixon got that right.

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    1. CommentedSugandha Pahwa

      this will be a giant leap to [fast forwarded] macro economics without nuclear proliferation. i just believe the soveriegnity over national "resources" is the giant leap. Not the borders, i can actually see unmanned borders.

    2. CommentedNathan Coppedge

      I was under the impression that oil was a major reason for the conflict in the Middle East. Fluctuations in gas prices almost always seem to be altered by so-called "political influences" in the Arab world, and U.S. prices have been affected by a strong "charity" approach which provides a cushion by pouring huge amounts of capital onto what was originally merely an "energy" issue. The relationship of the U.S. to oil borders on metaphysical, and so it is no wonder that there are gaping military expenses which, while industrial or quasi-permanent in nature, are well in excess of what you mention in your article. I wouldn't be surprised if 50 billion dollars is miniscule compared to the real expense of running aircraft carriers, buying rocket fuel, building missiles, and paying for infantry on passive duty, to say nothing of outright conflict involving vast mobilizations. Much like the domestic economy, what I might call the military economy is not something accurately accounted in the minds of common citizens.

    3. CommentedThomas Granado

      Professor, you nailed it, but to complete the analysis you must give more stock to the opposition. First, there is significant industrial opposition to exportation of gas -- those who benefit greatly from low electricity and feedstock costs (petrochemicals, steel). Second, while the environmental community is split, the anti-Keystone crew is adamant about renewables over hydrocarbons. Damn the economics; for them it's a zero sum game. The evident risk: DOE is holding up export approvals to non-FTA countries while Australia is pressing forward.

    4. CommentedZsolt Hermann

      The title is an interesting oxymoron.
      Indeed the question is can we achieve any kind of independence in an interdependent world?
      This article focuses on energy supplies alone, trying to propose political and economical gains from an assumed energy independence.
      But we are interdependent on multiple levels not only in terms of politics, financial institutions, energy supplies or the usual measures we like to use these days, but on all levels of our lives.
      And we are not only interdependent within the global human society but humanity itself is an integral part of the larger circle of nature surrounding us.
      Even this articles touches upon possible negative environmental effects of increased shale gas production which we have very little information about.
      Also switching from crude oil to gas only postpones the inevitable questions how constant quantitative growth would be possible in a closed, finite system.
      Is it really possible, even just looking at it from political or economical point of view, for a single country to surge ahead of others in a global, interdependent system when others stagnate or fall into crisis?
      As long as we keep concentrating on individual, national benefits only caring about the interdependent system in terms of how we can benefit from it regardless of others, or about environmental consequences (both of which goes against the natural laws of governing interdependent systems), or as long we keep ignoring the very reasons why we need increasing, never ending energy supplies to fuel our insatiable economic model, we will not find long or even short term solutions for our present problems, rather we will create more and newer problems like a drunk person driving on without sobering out recognizing where he is and where he should be going.
      All over the world we keep escaping forward without examining the real causes for the global crisis, but in the global, closed, interdependent system we exist in today we cannot cheat much longer.

    5. CommentedMarshall Kaplan

      Finally some one got it right. Natural gas will play a much more important role in our fuel mix in the future than in the past. Energy independence, however, is not quite an accurate goal and suggest separation. Reducing oil dependence is more accurate . what we need to do is to reduce the monopolistic conditions governing oil and gasoline markets for transportation and allow for flex fuels like natural gas and its derivative methanol. safe..environmentally better., less costs..Let consumers choose. M Kaplan see Over the Barrel at

    6. CommentedAkash Kaura

      USA is becoming increasingly energy independent, and China has significant reserves as well. This would pose a significant concern for India, would it not? Would this mean the India will need to make the transition to a knowledge based economy quicker than anticipated/planned? Looking at, and exploiting, alternative energy resources will require significant R&D which requires the fulfillment of 2 major pre-conditions:
      1. Presence of sufficient educated professionals
      2. Enough investment.
      Considering the current situation, would this mean that if India fails to make the transition in time, the future is not very bright?