On the Global Implications of Shale: Geopolitics of Energy


You have not heard from me for a while. In part, because we are busy preparing a new Energy Outlook, this time out to 2035 (and to be launched on January 15, 2014). But to some extent it was also because we are trying to get our heads around the potential global implications of what we are seeing in global shale oil and gas developments, based on last year’s Energy Outlook.

The result was a somewhat lengthy write-up.

To make this more digestible, I will publish it in installments. There is a first part, setting the scene, and then five parts dealing with five likely global implications: (i) on global oil and gas markets; (ii) on a new role for local policy; (iii) on the geopolitics of energy; (iv) on the global economy; and, last but by no means least, (v) on the environment.

After yesterday’s post on local policy, the third implication is again global; on the geopolitics of energy.

Geopolitics of energy - the big unknown

Having to make local decisions does not mean that the geopolitics of energy become less important. In fact, the third implication has been most widely recognized: It concerns the geopolitical consequences of shifts in the established centres of production and consumption. Nowhere is this better exemplified than by looking at the role of the Middle East.

We all have grown up in a world in which oil is the central fuel, and the Middle East is the world’s central oil supplier. For better or worse, the ensuing relations between the world’s largest oil consumer and this regional supply centre always had huge political consequences: there is no denying that a special two-way relationship has developed over time between the US (and the OECD more broadly) and small Middle Eastern economies which happen to be large oil producers.

These relations may be about to change, and in rather unpredictable ways.

Implausible as it may sound, twenty years ago, China was a net exporter of energy. By 2030 it is likely to become the world’s single largest oil (and natural gas, and coal) importer, relying on imports for almost 80% of its oil and more than 40% of its gas. Europe, over the same period, is likely to remain a large importer of fossil fuels - this is shown in the left hand chart below;

The US faces different prospects. Taking again the conservative production profile as our guide, the country will be nearly self-sufficient in energy by 2030. North America as a region (Mexico, the US and Canada) is likely to achieve this landmark even earlier. The US is a net coal exporter already and there is little doubt that it will become a net natural gas exporter soon. And while, in our conservative profile, it will remain a net importer of oil by 2030, these imports will have fallen drastically.

What are the consequences? Is it conceivable (and this is most definitely not a prediction) that a future American administration looks at this troubled region, wondering whether this is really skin of their nose because they need only very little oil – and the little they need, they can get from Canada and Mexico? We cannot know. The point is, it is unpredictable.

What is clear is that nature, markets, and presumably politics are not known to be fond of a vacuum. We cannot know how this one will be filled. But the geopolitics of energy relations as we have known them, are shifting.

Continue reading: On the Global Implications of Shale: The global economy

(Image by Steve Cadman, Flickr)

Ravinder Nagar

Assistant Director | EY | Ex AcuityKP | Ex Moody's Analytics | Mining and Metal | Energy & Utilities

10y

With the global focus turning towards Shale Gas, Infraline Energy a research & consulting company has published a report on Shale Gas Exploration in India: Potential, Challenges and Opportunities which includes To know more connect with me at ravinder.nagar@infraline.com http://www.infraline.com/Reports.aspx?id=252&tlt=Shale-Gas-Exploration-in-India---Potential,-Challenges-and-Opportunities.htm just now

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All this may be, but for the US, the question mark may be the impact of state-driven mandates, fees, fines, etc. which are in place to force behavioral changes--energy source shifting--by way of driving up costs for certain fuel types and setting minimums from sources, such as solar. Whether the economy or the body politic can digest these mandates is an open question. (The standards don't seem to be extremely high right now, but then it seems like more of a test for a bigger project.) Also, developments in fraking technology and science may likely extend the production of those wells and make others more accessible. The Annual Energy Outlook for 2013 (US) seems to rely heavily on first a shrinkage of energy production capacity (narrowing to supply levels) and then excess supply increasing from renewable generation. From the DOE report: "At present, most states are meeting or exceeding their required levels of renewable generation based on qualified generation [46]. A number of factors have helped to create an environment favorable for RPS compliance, including a surge of new RPSqualified generation capacity timed to take advantage of federal incentives that either have expired or were scheduled to expire; significant reductions in the cost of renewable technologies like wind and solar . . ." These incentives, for instance, those designed to make solar advantageous, seem to have failed. Several companies have closed up following tax payer investment. Further on, the report claims that after supplies of traditional energies are constrained in relation to demand: "By the end of the projection horizon, however, the surplus widens substantially as renewable generation technologies become increasingly competitive with conventional generation sources."

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Meredith Poor

Software Development Contractor

10y

"By 2030 (China) is likely to become the world’s single largest oil (and natural gas, and coal) importer, relying on imports for almost 80% of its oil and more than 40% of its gas." This assertion is simply based on taking trends of the last 25 years and projecting them forward another 25 years. There are three (or more) fundamental errors in this thinking, even though unpredictability works both ways. It's possible the numbers turn out to be good, just not for the reasons you've given.

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Meredith Poor

Software Development Contractor

10y

Error #1: Silicon based semiconductors were invented/discovered in 1947, and silicon based photovoltaic cells created in 1953. In 1988 (25 years ago) 32-bit single chip computers were about 2 years old. Power semiconductors based on silicon carbide (sapphire) were, at that point, a future technology. Blue LEDs are based on SiC substrates, these are now replacing conventional lighting. We are experiencing a 'filling in' of all the missing components of semiconductors are power collectors and transmitters, something that fundamentally rewrites all the rules of the energy portfolio. Error #2: If you live on a ranch in West Texas, and you're out of beer, you have to drive 50 miles to a store. If you can call up that store and have them fly it out to you, you have just avoided the gasoline expenditure of a 100 mile round trip in a pickup. If that 'drone' is electric, then no fossil fuel is used. The urban equivalent is something one might describe as the 'airport baggage handling expanded to the municipal level', where you 'call in' various purchase requests rather than physically transport one's self to a store. This can work in reverse, as a way of collecting (and incidentally sorting) refuse. While this idea is likely to face substantial resistance, there have been such implementations for written communications in the past. Any remaining technological barriers are insignificant.

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