A Global Energy Shift
Image Credit: Flickr (Nicholas_T)

A Global Energy Shift


The International Energy Agency (IEA) made headlines recently with the release of its annual World Energy Outlook report in which it predicted a monumental shift in global energy production through 2030. As with any major shift in the world economy, there will be large winners and equally big losers from this development.

To briefly summarize, the IEA report explains that the Western Hemisphere is undergoing a supply boom thanks to technological innovations that have made extracting shale gas and unconventional oil economically viable. This development opens up vast new energy reserves in this part of the world and promises to transform world energy markets accordingly.

The U.S. is possibly the primary beneficiary of this development. Already Washington boasts some of the cheapest natural gas production in the world, and its transport-to-market costs are low as well due to its developed infrastructure. Between the combination of sharp increases in domestic natural gas and oil production, as well as a decline in demand due to greater energy efficiency, the IEA estimates that the U.S will not only become energy self-sufficient, but in fact will become a major exporter, especially of natural gas.

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The economic benefits the U.S. will accrue from this seismic development should not be understated. Indeed, greater energy production will increase government revenue, lower unemployment, and result in more equitable balances of trade. Furthermore, if, as expected, the U.S. trade balance improves, the U.S. economy will be able to absorb more imports from countries around the world, including Asia. On the other hand, cheaper US domestic energy costs combined with other U.S.-led technological advances such as 3D printing, when compounded with rising labor costs in some current manufacturing hubs such as China, may well preempt the need for future U.S. consumers to buy so many foreign products in the first place.

While many countries continue to explore and discover potential sources of unconventional gas and oil, most lag behind the U.S. in their extraction capabilities, transportation infrastructure, and proven reserves. On the other hand, Australia is set to remain an energy star with its coal-bed methane, which is considered to be both easy and cost-effective to extract and could prove to be more competitive than America’s shale gas. Australia’s proximity to Asian markets, where much of the increase in energy demand will be coming from over the next few decades, also increases the country’s export potential.

China is also believed to have sizeable shale gas reserves which may be harder to access than those in the U.S., but it currently lacks the necessary extraction technology to bring them to market. Some speculate that recent Chinese energy investments abroad by companies such as Sinopec and the China National Offshore Oil Corporation (CNOOC) could be, at least in part, an attempt to acquire the technology to start exploiting these domestic reserves.

As China deals with its technological limitations, geological factors also hinder the country’s potential. One such striking weakness is China’s inadequate (and worsening) water supply, which will limit its shale gas extraction capability given the enormous amount of water this process requires. This does not bode well for a country that is already facing a serious water crisis that may worsen in the years ahead.

For Russia, which has relied on energy exports to prop up its otherwise weak economy and as a source of leverage over energy-hungry consumer countries in Europe and Asia, the change in world gas markets is going to be painful. Russian gas production already suffers from higher production costs due to various inefficiencies, and Moscow will find it hard to reap significant profits in the years ahead when prices will likely be undercut in Europe by U.S. exports and in Asia by Australian supplies.

This generally positive trend of lower global energy prices is not without its potential costs, however. While natural gas is cleaner to burn than coal, extracting shale gas raises environmental concerns which have already hindered its development in some countries. Indeed, there are already signs that this is occurring in China. Should environmental concerns gain too much currency in countries with substantial reserves, the world’s shale gas industry could fail to reach its potential.

Meanwhile, geopolitical shifts associated with the change in energy markets could be a mixed bag. If trends in energy exploration and extraction continue, the U.S. will have the option of being less involved in the Middle East. However, because most energy is traded on the open market, U.S. policymakers cannot entirely insulate the American people from the higher energy prices that would follow supply interruptions in the Persian Gulf. Equally, natural gas, which is more abundant in the Americas, cannot entirely replace petroleum, which is not only used for energy production / vehicle fleets. Consequently, Washington is likely to stay engaged in the Middle East to some degree or another. Russia, which currently buys much of its gas on the cheap from Central Asia and then exports it at high prices to Europe, may see less of a need to engage in the former. 

It should also be noted that the shift in energy supplies has the potential to undermine security in the Asia-Pacific, particularly if the U.S. reduces its presence in the Middle East. While grabbing fewer headlines than the increase in U.S. domestic energy production, the IEA report also noted that China, which is already the world's second largest energy consumer, will see its demand rise an estimated 60% by 2035, which assumes the economy does not hit a major road-bump before then. India, currently the world’s fifth largest energy consumer, will also see its energy demand more than double over the same period. And should Japan continue eschewing nuclear energy, it too will be forced to rely on increasing amounts of foreign energy sources to meet demand.

China, Japan and India’s energy insecurity could also raise tensions in the Middle East region if these countries believe they must take stronger measures to ensure the safety of their own supplies from this violate region. On the plus side, destabilizing tension and competition over energy exploration and extraction rights in the East and South China Seas could decrease, as cheaper energy prices may make the exploitation of such resources uneconomic and value destroying.

It is unusual for such large shifts in the world economy to occur. The shale gas (and unconventional oil) revolutions in the Western Hemisphere, particularly in North America, is one such change. While there is much ambiguity as to its actual effect on the changing energy landscape, it seems probable that people all over the world will be affected by the transformation forecasted by the IEA.

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