How the shale boom strengthens US diplomatic clout: Fuel for Thought

In a new Oilgram News(opens in a new tab) column, Fuel for Thought, Herman Wang explains how the abundance of domestic crude oil production gives the US diplomatic leverage and considers how — or if — that could change if export restrictions were lifted.

US Secretary of State John Kerry’s declaration last month that the US shale boom has been a “game-changer” in global diplomacy was surprising not for its underlying truth but for his frank realpolitik.

Diplomats, after all, like to keep their cards close to the vest, and furthermore, the Obama administration has not always thumped its chest over surging US oil and gas production, given its international advocacy on global warming.

But no doubt the shale revolution — and the US’ new role as the world’s swing oil producer — has enabled the US to flex its diplomatic muscle in ways unimaginable just a few years ago, when declining domestic production and seemingly ever-increasing demand made American consumers more dependent on crude imports.

Consider that since 2008, the US has increased its oil production by 4.1 million b/d, or 81%, while imports as a percentage of consumption shrank from about 60% in 2006 to 27% in 2014, according to the US Energy Information Administration.

“It’s hard to overstate how for several decades with regards to energy, most of our news with regards to oil was bad and the United States looked weak,” said Bob McNally, a former energy adviser to President George W. Bush. “Energy is now a source of strength and vitality. We’ve turned this thing around in a surprising way. It gives a whole new view of America as a power.”

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No wonder, then, that Kerry felt emboldened to declare at a Harvard University forum that the shale boom has “created incredible new possibilities” in diplomacy and “has had a profound impact on the budgets and choices of countries that have been creating some problems.”

Of course, he was referring to states like Iran and Russia.

US production helped create a global glut of crude that experts say played a key role in convincing China, South Korea, India and other buyers of Iranian crude that alternate supplies were plentiful, even with some 3 million b/d of unplanned disruptions in war-torn places like Libya.

With respect to Russia, with whom the US has feuded over the separatist uprising in Ukraine, US shale gas production likewise helped fuel an LNG glut that drove down prices and forced competition into the European market that Russian suppliers had long dominated.

“By reducing those revenue streams, we forced harsher choices between guns and butter on countries like Russia and Iran,” said David Goldwyn, the State Department’s former top energy diplomat from 2009 to 2011. “Unless the US is a significant importer of oil from a country, the more our conversations about their internal policies are liberated from the position that we’re in demand for their resources.”

Could the US export ban stunt shale’s growth?

The energy diplomacy extends to allies, as well. For example, the US has been able to share its shale fracking technology with countries like Poland and Argentina that hold large unconventional resources, opening up the possibility of greater energy security and diversified energy supplies.

The boom has also changed the US’ relationship with Saudi Arabia, with the US less reliant on Saudi crude.

“The surge in US oil production probably puts the Saudis and Americans on more equal footing for the first time since 1970,” said Matthew Reed, a vice president with Washington-based consulting firm Foreign Reports. “It means presidents won’t be asking kings to adjust their oil policies soon, which was a regular and awkward occurrence until recently.”

The next potential game-changer would be a dropping of the US’ long-standing restrictions on crude exports.

Many US producers and their allies in Congress have been heavily lobbying the Obama administration to change the policy, citing the additional diplomatic leverage that would provide.

The European Commission last month dispatched its energy head, Vice President Maros Sefcovic, to press the administration on crude exports in the name of energy security, and Japanese government officials told Platts last week that they are hopeful the restrictions will be lifted.

McNally, now a consultant, said leaving the export restrictions in place could damage US diplomatic interests in the long-term. Already, rig counts are falling and production growth has tapered off, due to low oil prices that could be exacerbated if production remains land-locked.

“If oil prices go back up — and they eventually will — that ban is going to come back and bite the shale oil sector. It’s going to prevent maximum investment in shale,” he said. “If we don’t lift the ban, it looks like we’re taking risks with our shale boom.” — Herman Wang