ENVIRONMENT AND ENERGY APRIL 21, 2010
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The words most often used by the heads of oil companies to describe the boom are “revolution” and “game changer.” Industry historian Daniel Yergin calls it “the shale gale.” Admittedly, serious questions remain as to whether shale gas will pass the ecological test—critics say it can’t be extracted safely in proximity to groundwater, and the EPA is engaged in a two-year study of extraction techniques. But, if producers can develop it on a global scale, we may be looking at a geopolitical disturbance as great as the 1970s Arab oil embargoes.
As it stands, the projected growth in global oil demand over the coming decades—and, therefore, the fiscal wherewithal of Venezuela, Iran, and the rest of the Middle East—relies largely on Asia’s roaring economy, because U.S. and European consumption is dropping as Western consumers react to higher prices by conserving more. Specifically, the increase rests on an anticipated surge in Chinese and Indian demand for cars. But, if their oil demand does not materialize as expected—if, for example, those future Chinese and Indian motorists drive fewer gasoline-fueled cars and more plug-in hybrids and electric vehicles recharged by natural-gas-fired power plants—that increase will be much smaller, or could even evaporate.
A surge in gas supplies would facilitate that switch, and experts say signs of such a shift are already under way. Beijing has said that it intends to satisfy more of its swelling electricity needs with natural-gas-fired plants and that its consumers will become the world’s largest group of buyers of electric cars and hybrids. Meanwhile, liquid natural gas (LNG) from Australia and Qatar—and possibly Alaska—that has been largely locked out of the United States by the domestic shale-gas glut is being aimed at the Chinese market. In addition, China itself has indigenous shale gas estimated at as much as 7.5 billion barrels of oil.
Lower Chinese oil demand would add to a challenge already posed by a surge of six million barrels per day of new crude-oil supplies expected from Iraq in the next seven or so years, which PFC Energy, a Washington-based consulting firm, forecasts will contribute to a long-term surplus of global oil. Oil surpluses mean lower prices, which could lead the petrostates—never a harmonious bunch—into a debilitating price war. “If they really start fighting in a diminishing-demand environment, prices could go straight down to twenty to thirty dollars a barrel,” says Fareed Mohamedi, PFC Energy’s head of country strategies. Oil is currently selling above $80 per barrel.
The results of the last energy-driven disruptions—the 1973 Arab oil embargo and the 1979 Iranian revolution—were a shift of much economic wealth to the Middle East and the bankrolling of the oil-rich Soviet Union for an additional decade, forestalling its eventual 1991 collapse. In this century, an oil-price spiral fueled the rise of Vladimir Putin’s full-throated Russia.
The gas age could well reverse those geopolitical shifts; $35-per-barrel or even $50-per-barrel oil would change the landscape for Russia, as well as Saudi Arabia, Kuwait, and other members of the Organization of the Petroleum Exporting Countries (OPEC), stripping away the disposable income to which they have become accustomed and subjecting them to political instability.
For example, low oil prices could finally force Putin’s Russia to address its considerable internal economic problems and diversify its economy. (There is evidence of such a shift in the Kremlin’s recent announcement of a $200 million plan to build its own Silicon Valley—a tech-savvy city outside Moscow for cutting-edge innovation.) And the increased gas supply could reduce Russia’s strategic leverage abroad. Already, because of the new American gas glut, Qatari LNG originally meant for the United States is being diverted to Europe at discount prices. That has undermined Gazprom, which controls a quarter of the European gas market and, in recent years, has terrified countries—such as Bulgaria, Hungary, Lithuania, Poland, and Slovakia—by temporarily shutting off pipelines that supply them. The threat to Gazprom’s European gas demand, in turn, has cast doubt on Russia’s state-dominated economic model, which is largely dependent on Gazprom revenue, and also on the company’s continued ability to serve as a spear point of Russian foreign policy. Over the last four years, Russia has cut Ukraine’s gas supply three times in what’s perceived locally as an attempt to demonstrate continued power over the former Soviet bloc.
For its part, the Saudi royal family depends on cash payments to ultra-fundamentalist local and regional Islamic groups, in some measure, for political survival. The Saudis also make such payments to outside militant groups as part of a policy of spreading the Kingdom’s influence throughout the Muslim world—a strategy that may no longer be possible in an era of rock-bottom oil prices. The Saudis “would have to think about where their interests really are long term,” says Charles K. Ebinger, director of the Energy Security Initiative at the Brookings Institution.
Other OPEC countries would be in even bigger trouble. Venezuela and Iran, for instance, are already stretched economically. With sub-$50-per-barrel oil, both could face a “devastating” financial squeeze, said Kenneth B. Medlock, who runs the natural-gas program at Rice University’s James A. Baker III Institute. The world’s most belligerent petrostates tend to speak more softly on the international stage when oil prices drop, and “Iran would change its posture toward the rest of the world,” becoming more conciliatory, Medlock says. Venezuela’s Hugo Chavez is already decidedly more friendly toward Western firms—in early April, he agreed to new terms in a gas extraction contract with Chevron, for instance.
Of course, there are factors that could undercut the drama wrought by shale gas: A meaningful shift in U.S. or Chinese electrification will take not years, but decades; and, in the same way that shale gas arrived without warning, another wholly unexpected discovery or event could shake up everything anew. Still, the current trend points to a time dominated by natural gas.
Washington has only begun to consider the economic impact of shale gas, and policy circles appear not to have registered the geopolitical ramifications at all. Yet, at once, some of the country’s most intractable problems may become much less so. If federal policy encourages the wholesale shift from coal- to natural gas-fired power plants, the United States could rapidly cut global greenhouse-gas emissions. Abroad, the United States could face a fundamentally different landscape in the Middle East, in which there is far less cash to foment mischief, and a weakened or even reformed Russia. But this change will be destabilizing in its own ways. The gas age could help unravel many maddeningly problematic knots, but Washington needs to grasp what’s coming and anticipate the landscape it will encounter.
Steve LeVine, a Washington-based writer on energy and foreign affairs, is the author of The Oil and the Glory.
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8 comments
The last I looked, the price of oil was down to $70 per barrel.
- NR114746
May 22, 2010 at 1:15am
From the many reports I've read over the past couple of years (including in TNR) about oil, oil politics, greenhouse gas emissions, and climate change, the sky is falling, so nobody will be around to benefit from the transformation of energy use described by the author. Maybe TNR should change the title of this piece to "Sky Not Falling".
- rayward
May 22, 2010 at 8:50am
From the many reports I've read over the past couple of years (including in TNR) about oil, oil politics, greenhouse gas emissions, and climate change, the sky is falling, so nobody will be around to benefit from the transformation of energy use described by the author. Maybe TNR should change the title of this piece to "Sky Not Falling".
- rayward
May 22, 2010 at 8:50am
If someone figures out an economical way to sequester the carbon emissions at the power plant, the world will indeed change dramatically. In the long run, however, I have read a very convincing case by a well-regarded physicist that solar energy, including to a modest extent bio-sources, is the only possibility. Energy is not created and cannot be renewed, it can only be harvested from a position of relatively low-entropy to be used for work and the production of higher entropy. Fossil fuels are an enormous store of low-entropy energy, but cannot be recreated because they took millions of years to create in the first place. Nuclear is similarly a finite legacy. The only source of additional low-entropy energy to our sphere is the sun. The article that I read calculated the total possible output from "renewable" resources such as bio-energy taking into account the land, etc. required. He considered the plausible best case for nuclear, wind, hydro, currents, geo-thermal, etc. and calculated the difference between our energy demand and all of those sources in the best case. There was a big gap and only two sources large enough to close the gap, fossil fuel while it lasts and solar. Nuclear was posited as a transitional source between fossil and solar. Of course, fusion energy would also be a game changer, but it is not at all clear that such a thing could every be made practicable as a source of useful energy. The containment problem may be insurmountable. Withal, natural gas will not solve our problems unless we can sequester the carbon. We will hit the wall on climate change before we run out of oil.
- roidubouloi
May 22, 2010 at 1:08pm
New drilling/completion technology permits exploitation of natural gas from shale. But, natural gas is less dense (kcal/ltr), compressed or even liquid, and much harder to transport and distribute than oil. For that reason a stupendous amount of the world's natural gas is still flared-off in the course of producing oil because there is nothing else to do with it at the wellhead on in a coal-mine. It is very dangerous there -- as we have just seen. In Anglo-America and Russia, what had been a large contribution to greenhouse gas emission -- flare-gas and worse, unburn't methane -- was reduced but only by subsidizing and monopolizing what the oligarchs of extractive industry -- calling themselves capitalists, commissars, or ... whatever -- previously discarded as waste. So, shale-gas is a new fuel only in the sense of being a much more costly -- post-peak oil -- source of energy than back when natural gas used to be less than worthless, flared-off or leaking as a dangerous waste-product from oil fields, coal deposits, or, yes, manure and silage. Even then it took elaborate government-financed infrastructure of gathering, transport, and distribution pipelines and compressor stations in and, now, all around developed countries to limit the flares somewhat. Compressing, shipping, and evaporating cyrogenic liquid natural gas (LNG) is an even more costly way to move natural gas from the formerly colonial production provinces to the great but no longer nominally imperial cities. More shale-gas in the US may not have a major economic or strategic effect without a lot of industrial policy or international infrastructure that commodity prices and political enthusiasm alone never seem to sustain as Anglo-America bounces from one asset-bubble to another. Moreover, the underlying political-economic question remains: How is exploitation of shale-gas going to be done and by whom? Will it be left to contingent-fee bond- and tort-lawyers, to Louisiana landmen and politicos? To Blankenships and Haywards? To Sarah Palin and Ken Salazar? Ultimately, I suppose, to Ben Bernanke and Tim Geithner or the even more posh David Cameron and Nick Clegg? Soothsayers and celebrities, is this where we get industrial policy and infrastructure? Evidently, Anglo-America and Russia both seem unable to regulate or restrain the oligarchs of their extractive industries and the associated financial institutions, paper-hangers and pyramid-builders, surplus intelligence operatives, Ponzi-schemers, "Sir This", "Lord That", "Comrade so and so". The rapacity of these legatees of un-republican, anti-democratic "convergence" and "blow-back" seem to be exceeded only by their incompetence. Hence, the migration of technically sophisticated petroleum engineering and service firms to "socialist" countries in Continental Europe and to "capitalist" Overseas China. Only the relatively small, seemingly inscrutable, insufficiently corrupt powers seem to be able to conserve energy and cultivate technology proficiently, boxing in competitive markets well above their weight. And, into the void created by pacification -- lawyerization rather than regulation -- of what had been a mighty Anglo-American petroluem marketing cartel over the course of the Great, World, and Cold War come exploration and production firms from the BRIC. These rude brutes are driving the chosen instruments of US foreign, now just financial, policy -- government indemnified bank-holding companies like BP, Transocean, Halliburton, Cameron -- back into home waters where they can maximize government subsidy or indemnity, all the while co-opting or corrupting government oversight. Oh, there is actually a new fuel out there: It is high-cetane di-methyl ether (DME). This can be reformed on a relatively small-scale close to any source of methane, fossil or renewable. This is nothing like the case with huge and inefficient -- also leaky, old, debt-ridden, and dangerous refineries -- located close to the point of consumption and used to distill or crack increasingly poor-quality oil into gasoline. DME is a non-toxic, non-cryogenic, hydrophilic gas which is easy to transport in any sort of rust-proof, hermetic container. It is ideal for high-efficiency jet or diesel engines because it does not produce soot. It is also usable for cooking fuel and other household or small-scale industrial applications -- like propane. Di-methyl ether is ultimately not a fuel at all, but a hydrocarbon transport system for solar energy synthesized into biomass. So, it has a future. Promoters of globe-girdling coaling stations and fleets of oilers needed to support Victorian and Edwardian navies, plantations, and mining concessions over the course of the Great, World, and Cold War have been failing for some time. Shale-gas will not save them or the rest of us.
- JRBehrman
May 22, 2010 at 3:54pm
Natural gas is used for electricity generation and heating, not transportation. It could displace other electric fuels such as coal, nuclear and renewables, which are domestic resources. Without electric cars, shale gas would not displace transportation fuels such as oil. It will be some time before electric cars have an impact, so it seems like a stretch to say shale gas will remake global politics.
- pborden
May 22, 2010 at 8:57pm
I am sorry but Iran has a $3.2-billion natural gas deal with China. China will help in the exploration of the offshore South Pars field, believed to be part of the world's largest natural gas reservoir. From wiki: In-place volumes are estimated to be around 1800 tcf (51 tcm) gas in place and some 50 billion barrels of condensate in place.[7] With in place volumes equivalent to 360 billion barrels of oil[8] (310 billion barrel of oil equivalent (boe) of gas and 50 billion bbl of condensate) the field is the world’s biggest conventional hydrocarbon accumulation even bigger than Ghawar oil field, which has 170 billion barrels of original oil in place. South Pars/North Dome Field The field recoverable gas reserve is equivalent to some 215 billion barrel of oil and it also holds about 16 billion barrels of recoverable condensate corresponding of about 230 billion barrel of oil equivalent recoverable hydrocarbons. Part of this is in Qatar and part is in Iranian coastal waters but Iran stands to benefit a huge amount. I am sorry there Mr. LeVine, but huh? What were you thinking?
- blackton
May 23, 2010 at 9:14pm
Gas does indeed have a bright future, but the author fails to fully account for the fact that many prominent oil producers (Russia and Iran, notably) also posess immense natural gas reserves. In many cases, these are in "conventional" reservoirs, meaning that they can be produced at low cost. Delivery is still an issue, of course, and countries such as the US may elect to pay higher costs for secure, domestic sources of supply. But don't count out the potential for some of the more obstreperous oil producers to transition to status as obstreperous gas producers.
- gwcross
May 24, 2010 at 12:33pm