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Publication Date : 30-11-2012
A seismic shift is under way in global affairs. At its most potent, this dynamic could conceivably upset the accepted wisdom of where the "centre of gravity" of the world economy will lie two decades from now.
A recent report from the Paris-based International Energy Agency (IEA) predicts that by as early as 2020, the US could surpass Saudi Arabia as the world’s largest oil producer — and achieve complete energy independence by 2030. The IEA forecasts that the US will increase its production to 23 million barrels a day (MMbd) in 10 years from total available supplies of around 10.3 MMbd currently. Oil and natural gas production in the US is increasing at its fastest pace in 50 years.
The IEA’s outlook on world energy has underscored what recent data have been pointing to: a perceptible decline in the dependence on energy imports for the US. The US, currently the world’s largest oil consumer using 18.8 MMbd (roughly 22 per cent of global production), imported about 45 per cent of its petroleum (crude as well as products) in 2011. After peaking in 2005, the share of imports in US energy consumption has declined a full 10 percentage points (from over 55 to 45 per cent currently).
Contrary to popular perception, 52 per cent of these imports were sourced from the western hemisphere, with Canada, Venezuela and Mexico supplying 29 per cent, 11 per cent and eight per cent of the US petroleum needs. Saudi Arabia, the second-largest supplier of oil to the US after Canada, accounted for 14 per cent of US petroleum imports in 2011. The wider Middle East/Persian Gulf accounted for 22 per cent of US petroleum imports in 2011, down by around 25 per cent since 2005.
The US has benefited from large domestic production gains, particularly in shale oil. This has been made possible by technological innovation in oil drilling such as "hydraulic fracturing" (or "fracking") as well as the opening of hitherto off-limit geologically rich production areas such as Alaska and the Gulf of Mexico (drilling activity in the latter was temporarily halted by President Obama following the oil spill caused from BP’s rig). What will this trend mean for the global economy? The virtual elimination of the US’s dependence on imported energy in the next one or two decades is being dubbed as a “strategic game-changer”. (The Wall Street Journal carried a piece with the headline "Saudi America" in its Nov 12, 2012 Asian edition.)
According to influential commentators like Niall Ferguson, the celebrated financial historian and Harvard University professor, the abundant availability of indigenous energy could spark a new economic “golden age” for the US. Uninterrupted supplies of relatively cheaper, and less price-volatile, fossil fuel could galvanise the US manufacturing sector into creating millions of new jobs. With its productivity advantages, coupled with a gradual convergence of manufacturing wages between developed and fast-growing developing economies, the US could also start becoming attractive once again as a global manufacturing hub, according to Ferguson.
Hence, rather than write off the US economy as a spent force, commentators such as Ferguson believe quite the opposite: that the US will continue to economically rival, and possibly dominate, competitors such as China and India well into the supposedly "Asian" century.
The replacement of imported fuel and the infusion of domestic energy in the US economy will have implications for the US dollar as well, according to this line of reasoning. According to forecasts by Deutsche Bank, reduced energy dependence would cause the US current account deficit to fall 30 per cent by 2016.
By virtue of these developments, the value of the greenback will appreciate, which will provide an added impetus to declining world oil prices. The possible reduction of geopolitical risk in global energy markets as a result of America’s energy "independence" resulting in a weaning away from the volatile Middle East, could trigger a sharp reversal in the international oil price. (This scenario assumes, however, that Saudi oil production has not "peaked" between now and then). By some expert reckoning, the geopolitical risk in current oil prices ranges anywhere from US$20 to $30 a barrel.
Such a large reduction in the oil price, should it occur, will exact a heavy toll on the budgets and economies of Middle Eastern oil producers. Given their demographics, most of these countries will need to continue ‘pump-priming’ their economies for the next decade at least to create jobs and provide social safety nets. The potential loss of oil income could be a devastating blow to their economies — and for millions of migrant workers who send billions of dollars in remittances to their respective countries.
The other major implication of these potential developments in global energy markets would be on food prices. If world oil prices do indeed trend down for the long run, it will remove the economic incentive for the push into bio-fuels. This in turn will be welcome news for the world’s poor, as both the stopping of food diversion for bio-fuels combined with lower transport costs will make a significant dent in food prices.
However, if the US economy does not decline into irrelevance by 2030, and is in fact rejuvenated, the global competition for resources will be even more intense — pressuring not only the environment but also prices for non-oil, non-food commodities.
A fascinating global energy landscape is unfolding. Whatever final shape it takes, our continued dependence on energy from fossil fuels will ensure that oil will continue to play a major role in our lives for the foreseeable future.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.