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Why the Energy Boom Won't Make America Into the New OPEC Why the Energy Boom Won't Make America Into the New OPEC

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Why the Energy Boom Won't Make America Into the New OPEC

Despite vast new oil and gas discoveries, the United States won't be able to brandish its new reserves as a geopolitical weapon.

(iStock)

photo of Coral Davenport
October 10, 2013

Forty years ago this week, a group of Middle Eastern petro-states introduced the world to a powerful new weapon. After the U.S. supplied Israel with an arsenal of missiles during the Yom Kippur War of October 1973, the Arab members of OPEC retaliated by cutting the U.S. off from its oil supply, kneecapping the economy for months. And although the embargo ended in March 1974, it served for decades as a reminder of the United States' utter dependence on foreign, and possibly hostile, states for its energy.

Until now. Over the past five years, the U.S. role in the global energy picture has been radically transformed. Technological breakthroughs have allowed companies to crack open vast reserves of oil and gas trapped in shale rock under North Dakota and other states. Earlier this month, the Energy Department projected that by the end of 2013, the United States will be the largest combined oil and gas producer in the world, surpassing Saudi Arabia and Russia.

Americans are already enjoying the economic benefits of the oil and gas boom. It has created jobs and helped drive a manufacturing renaissance. But emerging as the world's newest energy superpower brings geopolitical benefits, too, and the Obama administration is starting to flex its fossil-fuel-pumped muscles in foreign policy—where it can. "America's new energy posture allows us to engage from a position of greater strength," Tom Don­ilon, who stepped down recently as President Obama's national security adviser, said at a speech at Columbia University earlier this year. "It … affords us a stronger hand in pursuing and implementing our international security goals."

 

Many other energy superpowers brandish their resources as a weapon. Russia, which supplies natural gas to much of Europe, has shown no compunction about hiking prices or halting supplies during freezing winters in an attempt to exert control over other states. But for many reasons, the U.S. can't wield its energy advantage in the same way. For one thing, unlike in Russia and the Arab petro-states, the government in Washington doesn't control the energy sector and thus can't turn off the spigot with a word.

Still, America can now use energy to punish its enemies. Last year, in response to Iran's uranium-enrichment program, which the U.S. says is aimed at building nuclear weapons, Washington embargoed purchases of Iranian oil and called on other nations to do the same. Other countries feared that removing nearly 1 million barrels of Iranian oil per day from the global market would raise prices, but a surge in U.S. production, mostly from North Dakota, flooded the market and kept prices stable—allowing the sanctions to remain in effect.

"The sanctions against Iran proved more effective than people thought they would be," said Jason Bordoff, who until earlier this year served as the top energy adviser on the White House National Security Council.

The boom in natural-gas production also helps the U.S. extract more from its friends. The United States doesn't export its abundance of natural gas—yet. But the supply boom means domestic gas prices are the lowest in the world: about $4 per Btu, compared with about $14 per Btu elsewhere. Other countries—particularly China, whose rapidly growing economy is ravenous for cheap energy, and Japan, which is desperately searching for new energy sources after shutting down its nuclear-power plants in the wake of the Fukushima meltdown—are hungrily eyeing the glut of cheap American natural gas.

So when U.S. trade representatives negotiate with other countries, they have a new asset in their portfolio. In particular, the promise of access to U.S. natural gas is playing a role in the Trans-Pacific Partnership, a series of trade negotiations among the United States and a group of nine countries, including Chile, Japan, Mexico, Singapore, and Vietnam. At the table, U.S. negotiators are holding out the promise of special relationships with nations for natural-gas exports, in exchange for a host of trade concessions.

"We are offering up access to U.S. natural gas in return for what we want from other countries," such as better access to foreign technology, agriculture, and manufacturing markets, said Michael Levi, an expert on energy security at the Council on Foreign Relations. These are among the first geopolitical benefits of the boom, but deep thinkers are still figuring out how to make the most of the new wealth. In 2011, the State Department established a six-person Bureau of Energy Resources, charged in part with working on leveraging this energy supply into greater diplomatic strength. Today, the bureau has grown to 80 people, but work remains to be done. "We still underpunch our weight considerably on that agenda," said David Goldwyn, who initially headed the bureau and is now a private energy consultant.

But there's one thing the new oil and gas supplies can't do: insulate Americans against a price spike in the case of a major disruption. Were the Arab oil embargo to happen today, the U.S. would have access to its own oil supply, but the price shocks would nonetheless reverberate around the globe, hurting all economies—including this one. That's because, the country still can't go it alone despite the boom in domestic production: In 2005, the U.S. imported 60 percent of its oil; today, that's down to 40 percent. Nevertheless, America is still nowhere close to producing as much energy as it uses.

"Our connection to the oil market buys us new political capital," Goldwyn said, but he added, "We're stuck being in the Middle East for a long time to come."

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