Shale Gas and Foreign Policy

Not only has the shale gas revolution in the United States afforded the United States an opportunity to become energy independent, it is also creating a revolution in geopolitics.

Fracking, brought about by private industry working on private land, is on the verge of becoming an element of foreign policy.

Russia has dominated Europe’s energy policy for decades. It has controlled the natural gas market as one of Europe’s largest suppliers of natural gas. It has used the natural gas weapon to coerce the Ukraine and Europe. It has thwarted Europe’s efforts to construct new pipelines to obtain gas from other sources.

But now, because of the low price of natural gas in the United States, Russia has had to lower its price of natural gas to $10/million BTU. Cheap U.S. natural gas is on the verge of de-linking natural gas prices from the price of oil.

The United States is gearing up to export LNG. Romney has indicated he would “pursue policies … to decrease the reliance of European nations on Russian sources of energy.”

If the United States begins to export low-cost LNG to Europe, Russia will be hard pressed to maintain its price for natural gas.

The UK is probably going to proceed with fracking, as it has large potential shale gas reserves. The EU, on the other hand, because of its policy to cut CO2 emissions, is dithering on whether to use fracking. Poland and other eastern European countries are eager to pursue fracking, even in the face of opposition from the EU. Should the EU suddenly pursue fracking, Russia would be in serious trouble.

Russia depends on the income it receives from natural gas. Without this income it can’t invest in its outdated, wobbly natural gas and oil infrastructure. Russia is already abandoning investments in new fields. Gazprom’s market value has fallen from $365bn in May 2008, to $120bn in 2012 – a dramatic 70% drop.

In addition, Israel and Cyprus are about to develop large natural gas reserves in the Eastern Mediterranean – resulting in more supply destined for these two countries and Europe.

A large question mark on the world scene is whether China can develop shale gas.

According to the U. S. Energy Information Administration, China has probable shale gas reserves of 1.275 trillion cubic feet, which is about 45% more than the United States.

China has been investing in U.S. and Canadian companies in an effort to obtain the technology for fracking. While I was in China, I learned that exploratory fracking was taking place near Chungking.

If China can develop its shale gas together with the infrastructure to bring it to the cities, it would reduce the demand for LNG from Australia, the United States and Canada.

Japan, India and Pakistan lack shale gas reserves. They will be buyers of LNG from Australia, the United States and Canada.

The United States can influence world events with its supplies of cheap natural gas.

Fracking is the key to this international and economic advantage. Domestically, it means millions of more jobs. Internationally, it can influence politics, with Russia being in the most danger of cheap natural gas undermining its government and economy.

With Putin grabbing greater control over the Russian government, low cost natural gas from fracking may be a useful instrument when negotiating with Russia.

But U.S. government policies that curtail fracking in the United States will deprive the United States of these economic and political advantages.

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