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Why Shale Could Rebalance the Geo-economic Scales with China

Amy Jaffe

Amy Jaffe

October 18, 2012
As the candidates for president exchange barbs over whose policies will be a stronger bulwark against a rising China, the American oil industry may in the end accidentally provide the best solution. Growing shale resources in North America look poised to strengthen the U.S. economic and diplomatic position with respect to China, just as they have already done with respect to Russia. U.S. shale gas has already played a key role in weakening Russia’s ability to wield an energy weapon over its European customers. By significantly reducing U.S. demand for imported liquefied natural gas (LNG), rising shale gas production has freed up more of the global LNG supply to go to Europe instead of the U.S. As American shale production expands from natural gas to oil, the geopolitical fallout will also mushroom.

The strength of the U.S. economy and fate of the U.S. dollar come under pressure when rising oil prices increase our massive oil import bill, worsening the U.S. trade deficit. Such economic pressures are multiplied when dependence on oil from the Middle Ease forces us to deepen our military commitments there, thereby similarly adding to the U.S. deficit. All this weakens the United States relative to China, which holds a large chunk of U.S. indebtedness and also gets a free ride from expensive U.S. naval activities that guarantee the free flow of oil from the Persian Gulf. In fact, China may feel it benefits strategically if the U.S. is bogged down in Mideast conflicts, a possible explanation for its support of Iran and Syria.

Over time, shale development will reverse this strategic and economic disadvantage. Over time, it may well be the Chinese economy that is more exposed than the U.S. to the impact of Middle East developments. One way economists measure a country’s economic health is through an indicator called “current account.” Because the U.S. has a large national debt and imports more goods than it exports, economists say it has a current account deficit, a sign of weakness. Citibank estimates that rising domestic shale oil and gas production, by reducing oil imports and keeping “petro-dollars” inside the U.S. economy, will reduce the current account deficit by 1.2 to 2.4% of gross domestic product (GDP) from the current value of 3% of GDP. Citibank suggests that this would have implications for the U.S. dollar, “potentially helping it appreciate by 2% to 5% in real exchange rate terms.”

Just as the U.S. oil import situation will be easing due to rising shale production and improving U.S. automobile fleet efficiency, China’s oil import situation is likely to be deteriorating. China’s oil usage for transportation is expected to soar in coming years, leaving it more and more dependent on Middle East oil. As China’s economy becomes more exposed to conflicts in the Middle East than the United States, the tables may turn regarding which country is hurt more if Persian Gulf exports are cut off. At that point the question may become: Is the U.S. taxpayer willing to foot the bill for American military intervention aimed to protect China’s oil supply? Relative American energy self-sufficiency may dramatically alter the nature of the Sino-U.S. dialogue on foreign policy and military consultations/cooperation. Shale will also mean that the U.S. could also become an energy exporter to Asian allies like Japan and South Korea, thus strengthening U.S. ties in North East Asia with respect to a rising China.

In addition, affordable supplies of U.S. shale gas and natural gas liquids production may bolster the competitiveness of the U.S. petrochemical and manufacturing sector with respect to Chinese industry, which is increasingly dependent on expensive imported LNG. All of these trends may make the presidential election discussion about China somewhat moot. The message to the Chinese Communist Party leaders in Beijing might be more this: You may have counted out the American energy industry at your own risk.

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Amy Myers Jaffe—executive director of energy and sustainability at the University of California Davis Graduate School of Management and Institute of Transportation Studies—is a leading expert on the geopolitics of oil, energy, security and risk. Jaffe is widely published, most recently as the co-author of the 2010 book Oil, Dollars, Debt and Crises: The Global Curse of Black Gold. She is a frequent keynote speaker at major energy industry and investment conferences and has provided testimony on Capitol Hill on energy matters. 


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