The Shale Revolution’s Global Footprint

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MADRID – of negotiators are currently gathered at the United Nations
climate-change talks in Warsaw, creating a blueprint for a comprehensive global
agreement to be delivered by 2015. But, as the negotiators work, the world’s energy
landscape is in enormous flux. Given that most of the world’s CO2 emissions stem
from energy production and transport, it is critical to monitor these changes

In particular, the shockwaves triggered by the shale-energy revolution unleashed in
the United States are reverberating globally. With the advent of hydraulic
fracturing, or “fracking,” US oil production has risen by 30%, and gas production by
25%, in just five years. Shale gas contributed almost nothing to US natural-gas
supplies at the start of the century; by last year, its share had soared to 34%,
with the US Energy Information Administration predicting a further rise to one-half
by 2040. As a result of this bonanza, US domestic energy prices have plummeted.

The US, with all its geographical blessings, is on the road to energy
self-sufficiency and is reaping clear economic benefits. Development of
unconventional oil and gas supported 2.1 million jobs and contributed $74 billion in
tax revenues and royalty payments to government coffers in 2012. Industrial
competitiveness has soared, owing to much higher gas prices in Europe and Asia.
Refiners and petrochemical companies are flocking to the US.

But this does not mean that the US can withdraw into splendid energy isolation.
After all, energy is a global commodity. The effect is direct when it comes to oil
prices. Although oil accounts for a smaller part of the energy mix nowadays and
spare capacity is currently well ensured, chiefly by Saudi Arabia, a price shock
would still have global effects – as such shocks have had in the past.

Gas prices, by contrast, vary widely across regions: from under $4/MMBtu in the US
to around $10 in Europe and $15 in Asia. Until the gas market becomes more liquid
and more global, this spread will remain. Nonetheless, global economic
interdependence means that every country has a stake in others’ energy bills. If one
region’s economy falters, all countries feel the effects.

In Europe, shale-energy resources have largely remained in the ground. Even so, the
shale revolution across the Atlantic has been felt in diverse ways. For example,
decreased US demand for liquefied natural gas (LNG) has allowed gas prices to come
down in Europe. European utilities’ bargaining power vis-à-vis Russian gas giant
Gazprom has risen considerably – despite long-term oil-indexed supply contracts.

Yet European competitiveness is in danger. European companies are still buying gas
at around triple the price paid by US firms. This is unlikely to change in the near
future, as liquefaction and transport costs will keep LNG prices high even if the US
issues more export permits.

Finally, Europe’s energy mix is gradually shifting from the one that it needs to
reach its climate-change goals. As inexpensive natural gas has eroded coal’s
traditional share of electricity generation in the US, importing cheap coal from the
US has become more attractive to Europe. Especially in Germany, the Energiewende
(the shift away from nuclear energy following the Fukushima catastrophe in 2011) has
led to an increase in coal consumption. Indeed, coal is on track to provide more
than half of Germany’s electricity supply.

The EU’s position as a climate-change champion is in danger. Greenhouse-gas
emissions may have dropped as a consequence of reduced production amid the economic
recession, but the coal resurgence does not bode well for future targets.

Coal is king in China too, providing two-thirds of its power supply. But China’s
rulers know that this situation is unsustainable. Not only is air pollution a
growing source of concern, but diversification of energy sources is a crucial
national-security interest.

The scale of China’s unconventional energy endowments is still relatively uncertain.
But population density and water scarcity will certainly be inhibiting factors in
their exploitation. China maintains robust relationships with energy producers in
the Middle East, Russia, and elsewhere (including booming Myanmar) – to secure and
diversify its conventional sources. Just last month, Dmitri Medvedev’s first visit
to China as Russia’s prime minister resulted in a ten-year, $85 billion oil-supply
deal for the state-owned energy giant Rosneft.

Natural gas, however, is the weak link. Asia’s pipeline network is far too thin, and
gas prices are among the highest in the world.

That implies a potential boon to Russia’s main gas producers, especially as Europe’s
energy-diversification campaign weakens export demand. Indeed, given that oil and
gas revenues account for half of Russia’s federal budget, adapting to new realities
is virtually an existential imperative for the Russian state. There is opportunity
in Siberia’s frozen taiga, particularly the Bazhenov field, which may hold some of
the largest unconventional reserves in the world. But the investment needed to
develop these resources may remain in short supply in the absence of tax reforms.

The shale-energy revolution that started in the US is thus causing sweeping changes
worldwide. And incorporating shale gas into the world’s energy mix could help to
combat climate change by creating a bridge to a low-carbon future. So long as
methane leakage is contained, CO2 emissions from natural-gas combustion can be
significantly lower than those caused by reliance on oil.

Cheap energy sources, however, can eventually come at a high price, albeit with a
politically tricky time lag. Simply put, the current cost of pollution is too low,
while the level of urgency is high. In Warsaw and beyond, it is vitally important
that the international community reaches a sufficiently high common denominator in
limiting greenhouse-gas emissions. If not, we will not be able to limit the global
temperature increase to a sustainable level.

Javier Solana was EU High Representative for Foreign and Security Policy,
Secretary-General of NATO, and Foreign Minister of Spain. He is currently
President of the ESADE Center for Global Economy and Geopolitics and
Distinguished Fellow at the Brookings Institution.

Project Syndicate,

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