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Our Best New Foreign Policy Tool: Energy

By Alexanser Mirtchev

To date, the extensive policy debate over production of non-traditional fossil fuels, such as shale gas, and the resulting possibility for the use of those resources by the United States  has not adequately focused on an important consideration: the geo-economic and foreign policy implications and advantages to the United States, its allies, and global economic security overall, stemming from these new fossil fuel resources.

New gas resources and exports of liquefied natural gas (LNG) from the U.S. are an added economic resource, which can allow the U.S. to mitigate its own and the reliance of many of its allies in Europe on external sources of fossil fuels. Europe is extensively dependent on gas imports, especially from Russia, as well as  Algeria, Qatar and others. According to the International Energy Agency, Europe depended on oil and gas imports for over 60% of its demand in 2010, and this dependence is set to increase to over 80% by 2035. At the same time, the external energy suppliers to the EU have demonstrated their willingness to use the leverage of European energy dependence for foreign policy purposes. Several times in recent history, Russian disputes with countries through which those pipelines transit – most notably disputes with the Ukraine in 2006 and 2009 – have caused either actual supply shortages or fear of supply shortages to Europe, which was sufficient to roil the local markets. The simple knowledge that Europe depends on foreign gas has allowed exporters to use producer power as a foreign policy leverage.

The preferred manner of transporting gas to European markets has been pipelines, but currently only one meaningful alternative pipeline route is being developed – from Azerbaijan to Europe – to provide a check on Russian natural gas power. This raises the importance of LNG, the other alternative form of supplying distant markets. Because LNG is transported in vessels, supply is not limited by pipeline infrastructure but instead can be delivered to various markets so long as LNG regasification facilities exist. European countries such as Belgium, France, Italy, the Netherlands, Portugal, and Spain currently import LNG. Additional LNG regasification facilities and increased supplies of LNG on the world market will increase European energy security. This is where the U.S. is in position to become an adequate optional source of energy and energy security for its European allies.

With huge supplies of natural gas and the technical capability to produce large quantities of gas on a steady basis for years to come, the introduction of meaningful volumes of U.S. LNG into world markets will disrupt the current market, threaten the incumbents and ultimately lead to the creation of a liquid global spot market for LNG. It will not require duplicative infrastructure, only sufficient adjustments and adaptation to ensure that loss of other suppliers will not constrain consumers. Once European buyers are able to tap into liquid global markets rather than long-term contracts with one or two suppliers, they will be less intimidated by prospects of shutdown or other forms of manipulation of gas deliveries. The mere availability of adequate LNG regasification infrastructure and supply may be all that is necessary to prevent gas exporters from using natural gas supply as geopolitical leverage, nudge them to take diversification seriously and spur a wave of market reforms, contributing to the improvement of global economic security.

The geopolitical opportunities presented by the shale revolution and the prospect of LNG exports cannot be underestimated, and yet these considerations seem to rarely factor into the current debate in the US about LNG exports. The economic rationale for increased LNG exports from the US have been well documented. A recent IHS study puts the increase in US industrial production at $252 billion by 2020, thanks to lower energy prices in the US and other economic ‘spillovers’ from unconventional oil and gas. The objections fall into two categories: (i) those large US industrial consumers that benefit from low natural gas prices and thus for parochial reasons want to limit demand by closing off export markets in order to keep an imbalance between supply and demand that results in artificially low prices; and (ii) environmental interests opposed to hydraulic fracturing used to produce much US natural gas and who therefore want to close off export markets in order to try to limit natural gas production. While the economic case alone outweighs these objections, the case for US LNG exports becomes even stronger when one further takes into account how US LNG exports stand to advance US foreign policy, geo-economic and geopolitical interests.

Dr. Mirtchev is an economist who frequently writes on global economic security and energy issues

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