As the production of unconventional oil and gas in the United States rises -- and as the United States increasingly exports that energy -- the world’s economic map will be forever changed. The power of today’s petro states, such as Iran and Russia, will continue to wane. More and more, the United States will be the stable, competitive source of choice for gasoline, diesel, natural gas liquids, and, soon, liquefied natural gas (LNG).

In the past two years, the United States has licensed four terminals for exporting LNG, mostly to countries with which it has no free trade agreement, such as Japan and various Latin American and European countries. By 2020, the United States could export as much as 61.7 million tons per year of LNG. That would make the United States the second-largest LNG exporter in the world, next to Qatar. Other deals in the licensing queue are likely to push the total closer to 80 million tons per year, compared to Qatar’s current total of 77.

Not everyone is pleased with the coming export boom: domestic petrochemical manufacturers believe that the United States is in danger of exposing itself to global energy price volatility. But nothing could be further from the truth. Although there is some potential for that, the United States and the world have much more to gain -- in economic and geopolitical terms -- from expanding U.S. energy exports. The United States should thus embrace the role of energy exporter and think carefully about how to maximize the potential rewards, including by heading off attempts by coalitions of other energy producers to create artificial rises in oil and gas prices or to tack political restrictions onto importers, either of which could cause financial and economic harm to the United States and the global economy.


Much has been written about the shale revolution in North America, which has taken U.S. oil production from barely five million barrels per day prior to the 2007–8 financial crisis to almost 7.7 million barrels per day by the end of August this year. The increased production in the last few years alone amounts to three times the total oil production that has been lost to world supply as a direct result of Arab Spring violence in Syria, Yemen, and Bahrain. Add to that other hydrocarbons (U.S. natural gas production increased from 55 to 65 billion cubic feet per day), and Saudi Arabia’s own increase in output by two million barrels per day, and lost oil production in Iran no longer matters that much.

In theory, the extra production could have dampened the Arab Spring–related rise in world energy prices. But for most of the last decade, North America has not sent much of its unconventional energy outside the region. Over the next half decade, that will change. Commercial motives are the main reason, but demand from U.S. allies such as Japan and South Korea, who want to trade in oil as part of their security relationship with the United States, is also driving the charge. By 2020 or shortly thereafter, barring political barriers, the United States will likely be a net exporter of energy. North America as a whole surely will be.

The volume of exports, although impressive, is not even the most important aspect of the United States’ race to the top of the energy economy. Rather, it is the impact on the global rules of the game of oil and natural gas. The more LNG that flows over U.S. borders, the harder it will be for one of the world’s other major exporters -- Russia -- to use natural gas as an instrument of foreign policy, tying delivery to political objectives, as it has in Ukraine and, by implication, in all of Europe. Increased U.S. LNG exports combined with shrinking oil imports will also limit OPEC’s ability to control prices, as it has for the past half century.

So far, long-standing antipathy between Russia and the Gulf Cooperation Council (GCC) and the close U.S.-Saudi security relationship have weighed against a major Arab-Russian coalition on energy. But changing circumstances could push them together. Reportedly, Saudi Arabia has already made overtures to Russia about building an energy coalition. Media reports vary on the content of Riyadh’s proposal to Moscow, which was meant to push Russia to end its support of Syria and Iran. But the important thing is that the gambit will not be the last.

The prospect of coordination between Russia and the Arab world makes U.S. energy export policy all the more important. In theory, the United States could behave like Russia and OPEC and restrict hydrocarbon exports to certain partners for political reasons. (Recently, it has favored non–free trade agreement partners because only one free trade agreement partner -- Korea -- imports LNG in any large quantity.) But the United States will need to avoid that temptation. The best way to nip a Russian-Arab coalition in the bud is to promote open energy export. U.S. oil and gas should go where there is a profit incentive and where it can take advantage of U.S. antitrust restrictions. Even if Japan is willing to pay a security premium, for example, U.S. sellers should base their prices on the competition’s; they must charge what the market can bear, but not, unlike OPEC, set political target prices and then cut export sales to realize those prices. Luckily, there is no reason to believe that U.S. oil companies won’t operate in this way -- since they already are driven by private shareholders and U.S. antitrust enforcement. In turn, China and other new buyers without free economies will likely find that North American export terms are significantly more favorable and secure than those of other suppliers. And the United States will enjoy diplomatic and economic benefits that would have otherwise been hard to come by.

The result of a free energy trade policy could be an extraordinary uplift in U.S. power and influence well into the twenty-first century. Its long-standing vision of free trade, open global investment, and capital flows, which were somewhat battered by the 2007-8 financial crisis, will recover. After 40 years of politicized oil and gas markets following the OPEC oil embargo of 1973, the U.S. vision of a depoliticized free trade world is suddenly possible again -- at least for the energy sector, which is by far the largest sector of the global economy in terms of volume and value.


Somewhat astoundingly, debates about whether it is a good idea for the United States and Canada to sell their LNG continue. (Debates about crude oil exports have barely begun, but they surely will.) Those who argue against exports tend to misrepresent the way markets operate.

First, there is the issue of the impact on domestic prices. The concern that LNG exports would lead to higher prices dominated many of the comments offered to the U.S. Department of Energy’s initial reviews of LNG exports. That is bound to happen again as the volume of export permits increases. Surprisingly, some of the most global U.S. companies have raised concerns about the way seasonally driven demand from abroad could create swings in natural gas prices at home, reinforcing the fears of consumer groups.

It is true in principle that higher demand tightens markets. And, all other things being equal, it puts upward pressure on prices. But the U.S. market does not operate that way. First, U.S. production could almost certainly rise at least another 25 percent, keeping prices close to today’s rather reasonable levels. Beyond that, the U.S. market is not isolated from the integrated North American market. The fact is, booming production in Pennsylvania has already resulted in lost market share for natural gas producers in the U.S. southwest, who have, in turn, pushed Canadian oil and gas out of the U.S. mid-continent -- all with no significant impact on overall North American prices. As the United States begins to sell LNG abroad, it will open its own markets back up to Canadian supplies, allowing a shift in sales to the most efficient geographical buyer. That will significantly mitigate any higher prices at home that would follow more exports, bringing a higher optimum revenue stream for both Canadian and U.S. producers, with positive results for employment and consumer spending in both countries.

The North American market is so tightly integrated because all three North American countries are committed to free trade. As long as the United States is connected with Canadian and Mexican gas markets -- and it will continue to be, because exiting NAFTA would be so deadly -- U.S. prices will be inescapably linked to global markets by virtue of Canadian or Mexican exports. Simply put, there is no way to fully wall off the U.S. energy market from the world’s, so the United States might as well reap the benefits of trade by exporting energy itself.

The other positive artifact of the integration of the North American energy market is that, even though it links the U.S. energy market to the world’s, it provides some insulation from what occurs elsewhere. In recent years, even as European demand for energy has fallen off, Mexico has become a major market for U.S. pipeline exports, which now hover just below two billion cubic feet of gas a day. Pipelines under construction from the United States to Mexico will boost U.S. export capacity to eight billion cubic feet per day by 2016. Meanwhile, U.S. pipeline exports to Canada’s eastern provinces are also growing. So far this has come at a loss to Canadian producers, but they have the capacity to fill any gaps in the lower 48 if needed. And the moment that flow restarts, price moderation should result.

Regardless of the insulating effects of North American energy market integration, there are those (namely, the companies that filed statements at the U.S. Department of Energy) who have argued that, because seasonal demand for global LNG fluctuates wildly -- by as much as 25 percent of demand -- exporting more energy will bring increased seasonal volatility to U.S. markets. But this argument ignores the fact that world demand will be met not only by U.S. LNG exports but by exports from a wide variety of suppliers, including from Africa, Australia, countries in the Middle East, and, perhaps, Russia. Market competition between those countries is expected to be intense. The more competition there is, the more supplies there are, and the more liquid those supplies are, the more the global market will mirror the competitive U.S. market, which stores energy when there is low demand and releases it when the time is right.

The United States might even benefit from global seasonality because its storage capacity is so much greater (and cheaper) than anywhere else in the world. The United States could well become the global swing hub for natural gas. Indeed, every year, U.S. energy firms build more LNG storage, which will surely be put to good use.

As the United States optimizes its natural gas supplies for export and storage, energy will be more easily delivered everywhere. Supply bottlenecks are what cause price volatility to begin with, as any Boston consumer can attest. There, the historical lack of local storage and limited pipeline deliverability produces sudden price climbs in cold winters. What has been proved by both the building of large pipelines such as the Rex Express, which connects Colorado and Ohio, and by the exploding production in Pennsylvania, from virtually nothing three years ago to almost 20 percent of total U.S. supply, is that new supplies tied to integrated markets reduces rather than raises price volatility. Winter price swings in the U.S. northeast, particularly Pennsylvania, have recently been cut in half.


Barriers to open trade and investment in energy have long dogged the United States and the global economy. For example, there is no doubt that at least some of the rapid increase in world energy prices between 2005 and 2008 was the result of insufficient investment in oil and gas production in the Middle East, Russia, and, to some extent, in China. In most cases, underinvestment was intentional, to slow production growth in order to influence global energy prices. But now, India, China, Norway, and Mexico have started encouraging their national oil companies to invest in shale plays in the United States, and others from the Middle East and Russia are taking a hard look. They are looking to bring U.S. supplies and technology home to make themselves better able to tap into their own unconventional resources.

The United States should look favorably on national oil companies engaged in such capitalist adventurism. Over the past 30 years, the United States, the International Monetary Fund, and the World Bank have promoted privatization of state-owned energy firms in many developing countries. Privatization, they maintain, ensures a freer flow of energy in the local and global economy and helps countries better align their national balance of payments and foreign debt. The policy, where successful, has transformed many state firms, such as Petrobras and China’s CNOOC, into more aggressive, commercially oriented global competitors. The more the United States opens itself to those players, the more market-oriented they will likely become.

The United States should keep its borders to foreign investment in the energy sector open for another reason: foreign investment in U.S. domestic resources has already contributed to rising U.S. domestic production. According to the U.S. Energy Information Administration, 20 percent of the $133.7 billion in investment in U.S. shale plays between 2008 and 2012 included joint ventures by foreign companies. Reciprocity abroad for U.S. oil firms would be equally beneficial. As a large consuming nation, the United States should insist that cross-investment be part of an overall framework that keeps all markets open to global trade and investment, including access to U.S. markets for non-oil commodities such as financial services and other goods.

U.S. LNG exports are just the first step in removing the politics from global hydrocarbon trade, since what is unfolding in global gas markets could also unfold for global oil markets. And with light sweet crude becoming superabundant on the U.S. Gulf Coast, exports of oil are bound to become a hot topic a year from now. With that in mind, the United States should think carefully about the kind of exporter it wants to be, promoting free trade and investment wherever possible, with no political strings attached. Undoubtedly, as shale gas and shale oil bring down energy prices for the world as a whole, countries that depend on hydrocarbon revenue will need to adjust. Although difficult, that adjustment will ultimately leave them better off as they free themselves from the natural resource curse of corruption and violence. As protests across the Middle East have so dramatically shown, the current energy economy has not produced successful and politically sustainable societies in the oil-rich developing world. One hopes that the United States–led energy economy will do better.

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