Kennan’s Warning on Ukraine
Ambition, Insecurity, and the Perils of Independence
For the Donald Trump White House, last week’s “Energy Week” was an opportunity to highlight, through a series of events and speeches, its goal of “energy dominance.” By this administration’s reckoning, ramping up production and exports—particularly of oil, gas, and coal—can make the United States an energy superpower. To an extent, it is right. The shift from energy scarcity to abundance over the past decade has already bolstered the United States economically and geopolitically. But such a search for dominance ignores the interdependent nature of today’s global energy market. And in any event, true dominance comes not just from energy supply. U.S. energy strength also depends on investing in tomorrow’s new energy technologies, maintaining its leadership role in global energy cooperation, increasing its resilience to market swings, and protecting the environment.
Ever since U.S. President Richard Nixon launched “Project Independence”—a strategy to make the United States energy self-sufficient by 1980—in the middle of the Arab Oil Embargo, political leaders from both parties have embraced energy independence as the ultimate objective of U.S. energy policy. Although it is a catchy slogan, the concept ignores that the oil market is global, so a supply disruption anywhere will affect prices in the United States, even if the United States imports no oil whatsoever.
“Energy dominance” is an evolution of this theme. The phrase was first coined on the campaign trail, when candidate Trump made clear that “American energy dominance will be declared a strategic, economic, and foreign policy goal of the United States.” Key Trump administration officials, including Energy Secretary Rick Perry and Interior Secretary Ryan Zinke, later adopted the idea.
The concept is still murky at best, but the administration has nonetheless rhetorically focused on the benefits of more U.S. energy production and exports—especially oil, gas, and coal—as Trump did in his remarks last week. Administration officials also emphasized the potential of nuclear power, which—as a zero-carbon energy source—is key in the battle against climate change, since renewables alone cannot achieve decarbonization.
Gutting environmental rules could actually undermine energy production.
Meanwhile, in a Washington Times op-ed, Perry, Zinke, and U.S. Environmental Protection Agency Administrator Scott Pruitt explained the energy dominance concept: “An energy-dominant America means a self-reliant and secure nation, free from the geopolitical turmoil of other nations that seek to use energy as an economic weapon.” They went on to argue that “an energy-dominant America will export to markets around the world, increasing our global leadership and influence.”
For an administration that views exports as key to U.S. strength, “dominance” is a terrible marketing slogan. Consumer countries are wary of suppliers that seek to dominate them—for example, Eastern Europeans buying their natural gas from Russia, or Mexico, which has sharply increased its reliance on U.S. natural gas and now frets about political risk in its dominant supplier. Aspirations to dominate suggest a view of global energy markets not based on cooperation, but in which nations “compete for advantage,” as National Security Advisor H.R. McMaster and National Economic Council Director Gary Cohn explained recently. Yet the United States will remain one of the largest net oil importers in the world for years to come, and gross trade flows are even higher. The country benefits from interconnected, well-functioning global energy markets, not just from dominance.
To be clear, the Trump administration is right that greater supply and exports would be beneficial to the United States. Within a span of only a decade, between 2005 and 2015, U.S. natural gas production increased by as much as 50 percent, making the country by far the largest natural gas producer in the world. The increase in oil production was even more dramatic, almost doubling between 2008 and mid-2015, before tailing off and then recovering again over the last two years.
The shale boom has been one of the strongest buttresses supporting the recovery of the U.S. economy following the Great Recession. Economists Michael Greenstone and Chris Knittel found large net benefits for shale-producing communities, even after negative health effects and social impacts were considered. In a paper for Brookings, meanwhile, the economists Ryan Kellogg and Catherine Hausman similarly found that because of the shale revolution, natural gas prices were about half what they otherwise would have been, saving an average of $74 billion annually for commercial, industrial, and household energy consumers between 2007 and 2013.
More production means fewer imports. The United States has slashed net petroleum imports in the past decade, from 60 percent of U.S. consumption in 2006 to just 25 percent last year. In 2005, it was projected that by 2015, the United States would be importing 27 percent of its daily gas use—a volume nearly twice that which Qatar, the world’s largest LNG exporter, puts on the market today. Instead, this year, the United States will be a net gas exporter.
And these natural gas exports, in particular, can make America an energy superpower. Unlike coal or oil, which can be moved easily between ports, exporting natural gas has been a far trickier proposition, usually requiring pipelines between buyers and sellers, and it comes with unique energy security risks for gas-consuming countries, since suppliers can (and have) cut off gas flows. But increasingly, the United States exports liquefied natural gas, which is linked to a hub price and has no destination restrictions. That means more competition, liquidity, and supply diversity—and that will make global gas markets more flexible, efficient, and secure. Europe, in particular, will be more able to implement its Energy Union package to reduce its vulnerability to Russian gas dependence through market integration, interconnectivity, and diversification.
Since the U.S. ban on oil exports was ended in late 2015, oil exports, too, have risen sharply—to nearly one million barrels per day in the first quarter of 2017. Unrestricted crude oil exports allow markets to work more efficiently and boost U.S. supply, since producers can sell their oil at global market prices rather than discounted domestic prices to refiners ill-suited to handle the quality of domestic shale oil.
Although the United States has become an energy producer on the scale of Russia and Saudi Arabia and is increasingly an exporter as well, it is important to note a critical difference. Russia and Saudi Arabia are vast net exporters, which gives them greater influence over global markets and politics in specific countries that rely on their energy. The United States, by contrast, remains the second largest net oil importer in the world. Even the most aggressive assumptions of growth in U.S. oil output do not see the United States becoming self-sufficient unless it sharply curtails demand, too.
Together, Russia and Saudi Arabia are also working to manage global oil prices through a deal between exporters (both OPEC and non-OPEC) to cut production. The United States could not do that even if it wanted, since its production depends on thousands of independent firm decisions, not government policy.
Consider that Saudi Arabia’s dominance in the oil market comes not only from how much it produces or exports, but from its willingness to drill significantly less oil than it could, thus leaving it as the only supplier with any meaningful ability to quickly bring new oil supply into the market to compensate for production losses elsewhere. Similarly, U.S. shale oil is uniquely able to help stabilize market fluctuations because it can be ramped up and down quickly compared to conventional oil output. But such flexibility still results from the decisions of thousands of firms, which does not happen overnight. U.S. shale oil cannot be brought to market by the government nearly as quickly as true spare capacity, and thus it does not deliver the same geopolitical influence as Saudi Arabia’s extra production.
For its part, Russia’s dominance in the gas market has derived from its willingness to use energy supply—particularly its natural gas exports to Europe—as a tool for geopolitical leverage, something the United States neither can do, nor should. That is why it was a mistake for U.S. secretary of state Rex Tillerson to express U.S. opposition to the Nord Stream 2 pipeline project, which would bring more Russian natural gas to Europe, in the same sentence in which he noted the U.S. desire to sell more LNG to Europe. A U.S. foreign policy that comes to be seen as motivated by U.S. commercial interests may alienate potential buyers, undermine support from allies, risk retaliation from other gas exporters, or lead U.S. gas to be viewed as a politicized commodity.
Energy dominance, if the unfortunate term is to have any meaning, is also about far more than hydrocarbons. Dominance means leading in renewable energy sources, which will be by far the fastest growing form of energy around the world in the years ahead. And on that score, the Trump administration has already come up short. The White House’s proposed budget slashes funding for the Department of Energy’s Office of Energy Efficiency and Renewable Energy by 70 percent. Meanwhile, China plans to invest $340 billion in renewable energy sources by 2020. China invested more than twice as much as the United States in renewable energy in 2015, and dominates the global solar panel and wind turbine industries. It is now taking steps to dominate the global battery and electric vehicle market. Regardless of one’s view of climate change, growth in clean energy will continue and present enormous economic opportunities.
Dominance also means creating the technologies of tomorrow, including advanced nuclear and carbon capture, storage, and utilization technology as well as solar paint, grid-scale energy storage, and many other potential breakthroughs. Here again, the Trump administration’s budget proposes to eliminate the DOE’s Advanced Research Projects Agency-Energy, the agency charged with funding potentially transformative energy technologies and innovation. Trump’s budget also zeroes out Mission Innovation, an initiative committing the United States and 21 other nations (plus the European Union) to double energy research and development spending over the next five years. Beijing, by contrast, plans to double its yearly spending on energy research and development by 2021.
To dominate, the United States would further have to lead in the global energy community—and no effort is more central than that of nearly every country to address the threat of climate change through the Paris climate agreement. In the past, the United States has played a leading role in global climate negotiations, recognizing that doing so strengthened, rather than weakened, the United States both diplomatically and economically. Withdrawing from the agreement upset diplomatic relationships and undermined U.S. credibility. As Washington gives up its seat at the table, meanwhile, crucial commercial issues such as intellectual property, transparency, and trade will be decided without anyone to look out for U.S. interests. That is part of the reason so many major U.S. companies were against withdrawing from the agreement—and why China has made clear that it intends to fill the void, seizing yet another opportunity to enhance its own soft power.
Energy dominance would, moreover, imply that the United States has worked to reduce its vulnerability to global market swings. Simply boosting U.S. oil production does not reduce the price at the pump when global oil prices spike. Protecting consumers comes rather by reducing how much oil we use. If the Trump administration follows through on calls to ease fuel economy standards, it would exacerbate energy insecurity and increase import dependence.
Finally, dominance means being strong enough to grow the economy and increase energy production while protecting the environment at the same time. From 2000 to 2013, as China’s economy grew rapidly, it roughly tripled coal production. But its toxic levels of air pollution and other severe ecological damage constitute a major vulnerability. By contrast, as the shale revolution has boomed and the U.S. economy has grown 12 percent since 2008, U.S. carbon emissions have fallen 11 percent and emissions from the six principal air pollutants have fallen sharply. To reverse that progress by eliminating environmental protections is not dominance, yet this administration has aimed to ease or reverse many environmental rules, from those regulating power plant emissions of carbon dioxide and mercury and other air toxics to others aimed at protecting streams and wetlands and also waterways from coal mining operations.
Striking such protections, moreover, is not even necessary to boost U.S. energy production and exports—the key metrics in this administration’s view of dominance. The outlook for U.S. energy production will be determined far more by market forces than by rolling back environmental regulations. The decline in domestic coal use, for example, has been driven by cheap natural gas, stagnant electricity demand, and falling renewable costs. Reversing Obama-era environmental rules—particularly the Obama administration’s Clean Power Plan—does little to bring back coal. Instead, the future of the U.S. coal industry will largely depend on natural gas prices and Asian demand, as well as competition from other coal suppliers such as Australia and Indonesia. Similarly, in today’s depressed oil market, few if any companies are lining up to drill in the challenging environment of the Alaskan Arctic, even if the region is open to drilling. And few companies are expected to access new coal reserves even if the Obama administration’s temporary moratorium on coal leasing on federal lands is lifted.
Indeed, gutting environmental rules could actually undermine energy production. These rules not only protect air and water quality and public health, but also build public support for oil and gas production by assuring communities that it can be done safely and responsibly. At a time when public support for fracking is falling, reassuring people that regulators are protecting them is a pro-production policy that builds industry’s social license to operate.
Ramping up U.S. energy output and exports brings large economic and geopolitical benefits, to be sure. But that alone will not make the country dominant. American energy strength can be better demonstrated if, at the same time that it produces more, it also continues to lead the world on energy cooperation and environmental protection, reduces exposure to market fluctuations, increases resilience to climate change impacts, and invests in developing tomorrow’s emerging energy technologies.