The New Power Map

World Politics After the Boom in Unconventional Energy

Dmitri Medvedev wishes "Good Luck!" to the Nord Stream pipeline. (Alexander Demianchuk / Courtesy Reuters)

The energy map of the world is being redrawn -- and the global geopolitical order is adrift in consequence. We are moving away from a world dominated by a few energy mega-suppliers, such as Russia, Saudi Arabia, and Venezuela, and toward one in which most countries have some domestic resources to meet their energy needs and can import the balance from suppliers in their own neighborhood. This new world will feature considerably lower energy prices, and in turn, geopolitics will hinge less on oil and gas. Within the next five to ten years, regimes that are dependent on energy exports will see their power diminished. No longer able to raise massive sums from energy sales to distribute patronage and project power abroad, they will have to tax their citizens. The revolution in unconventional energy production results from technologies that make drilling and extraction from underground shale formations increasingly easy and cheap. One cutting-edge procedure, hydraulic fracturing, involves injecting a mixture of sand, chemicals, and either water, gel, or liquefied greenhouse gases into shale rock formations to extract hydrocarbons. Although the technique was first conceptualized in 1948, only recently have other technologies arrived to make it commercially viable. (One such procedure, horizontal drilling, allows operators to tap into shallow but broad deposits with remarkable precision.) Hydraulic fracturing has been used widely for only about the past five years. But the result -- a staggering glut of natural gas in the United States -- is already clear. The price of natural gas in the country has plunged to a quarter of what it was in 2008. The low price has prompted changes throughout the U.S. economy, including the projected retirement of one-sixth of U.S. coal power generation capacity by 2020, the conversion of hundreds of thousands of vehicles from gasoline to compressed gas, and the construction and repatriation from China of chemical, plastic, and fertilizer factories that use natural gas Meanwhile, the United States is using innovative energy technologies ever more frequently to extract shale oil, tight oil, and methane from coal beds. Accordingly, the share of U.S. oil consumption that is imported from abroad has fallen sharply, from about 60 percent in 2005 to less than 45 percent this year. It will likely continue to decrease until the country, or at least North America, is energy self-sufficient. The economic and geopolitical shockwaves will be felt worldwide. Decreasing demand in the United States for liquid natural gas, oil imports, and domestic coal is already reducing global prices for these commodities. As a result, European countries have a stronger position in negotiations over natural gas imports with Russia, from which they receive a quarter of their supply. The newfound leverage might have emboldened the European Union to open an investigation in September into a possible price-fixing scheme by Gazprom, the Russian energy giant. In addition, European countries have been negotiating fewer long-term gas contracts with Russia in which the agreed-upon price for the gas is pegged to that of oil -- the kind that Gazprom favors. Instead, they are opting for spot purchases -- short-term acquisitions based on market prices -- in the expectation of rising supplies and falling prices. Russia has already granted some countries roughly ten percent discounts on existing contracts. Until recently, Gazprom was in denial about the shale gas revolution, claiming that unconventional gas technology was not commercially viable, and that it posed severe risks to the environment. Given that Russia raises most of its federal revenue from energy exports -- about 60 percent, according to most estimates -- a reduction in natural gas sales would be politically catastrophic. Both the collapse of the Soviet Union and the downfall of former Russian President Boris Yeltsin in the late 1990s coincided with periods of low energy prices; Vladimir Putin, the current president, knows this history all too well. The problem is that all of his options in a world awash with cheap energy are bad. His regime could try to maintain Russia's market share in Europe by continuing to reduce prices, but that would mean accepting drastically smaller revenues. To make matters worse, Gazprom's profit margins are low. Given that it sells 60 percent of its gas domestically at a loss, Gazprom must obtain wide profit margins from its European exports to stay afloat. (Currently, it sells gas in Europe at about a 66 percent profit margin.)

Read the full article on