The global impact of US shale

The rise of US shale energy is also having a broader global economic impact: American shale gas is changing the balance of competitiveness in the world economy, giving the US an unanticipated advantage. Indeed, inexpensive natural gas is fueling a US manufacturing renaissance, as companies build new plants and expand existing facilities.

Throughout Europe, industrial leaders are becoming increasingly alarmed by enterprises' loss of competitiveness to factories that use low-cost natural gas and the consequent shift of manufacturing from Europe to the US. This is particularly worrying in Germany, which relies on exports for half of its GDP, and where energy costs remain on a stubbornly upward trajectory. These high costs mean that German industry will lose its global market share.

Whatever their targets for shifting their energy mix, European Union countries, already suffering from high unemployment, will be forced to reconsider high-cost energy strategies or face weakening competitiveness and loss of jobs.

The geopolitical impact is already evident. For example, Iran is now seriously at the table in nuclear negotiations, which might well not have happened were it not for tight oil. When strict sanctions were imposed on Iranian oil exports, many feared that world oil prices would spike, and that the sanctions would ultimately fail, owing to insufficient alternative supply. But the increase in US oil production over the last two years has more than made up for the missing Iranian output, enabling the sanctions (bolstered by parallel financial measures) to work - impelling Iran to negotiate seriously, which it was unwilling to do only two years ago.

In Arab capitals, anxiety is mounting that a rapid increase in US tight oil production will fuel wholesale US disengagement from the Middle East. But this overstates the extent to which direct oil imports shape US policy toward the region. To be sure, rising US output, combined with greater automotive fuel efficiency, will continue to reduce US oil imports. And, while the US will still import oil in the years ahead, more of it will come from Canada (notwithstanding the debate over the Keystone XL pipeline).

But the fact is that Middle East supply has not loomed very large in the overall US petroleum picture for some time. After all, even before the growth of tight oil, the Persian Gulf provided only about 10 percent of total US supply. It was not direct US oil imports from the Middle East, rather oil's importance to the global economy and world politics that helped define US strategic interests.

The Middle East will continue to be an arena of great geopolitical importance, and its oil will be essential to the functioning of the global economy. This implies that the region is likely to remain a central strategic interest for the US.

Overall, however, the shale energy revolution does provide a new source of resilience for the US and enhances its position in the world. The emergence of shale gas and tight oil in the US demonstrates, once again, how innovation can change the balance of global economic and political power.

The author is vice-chairman of IHS and winner of the Pulitzer Prize for his The Prize: The Epic Quest for Oil, Money, and Power.

Project Syndicate

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