Globalised energy sector hard to escape

Advocates for more domestic oil and gas production maintain that a reluctant Biden administration leaves the US economy exposed to foreign whims, though a globalised economy is difficult to escape.

The US government recently announced plans for oil and gas leases on federal territories, but only after a court order and a lawsuit from the American Petroleum Institute (API) and its allies forced its hand.

US president Joe Biden enacted a moratorium on new drilling in one of his first acts in office and his policies so far have been generally in favour of a green agenda. And while those in the energy sector are pivoting to a cleaner future, oil and natural gas will still be part of the global economy for the foreseeable future.

The US is a global energy leader and Washington should capitalise on that rather than squander its vast energy resources, Frank Macchiarola, a senior vice president for policy, economics and regulatory affairs at the API, tells NGW.

“Unfortunately, while American energy demand continues to rise as the economy recovers, misguided policies like the federal leasing pause could exacerbate the supply and demand imbalance and in the long run negatively affect US consumers and increase our dependence on foreign energy with lower environmental standards,” he said.

Inflationary pressures are already impacting American families. Consumer spending in July, the last full month for which the government has data, expanded by 0.3%, compared with 1.1% in June. Energy prices in general are increasing much faster than other consumer goods, and US natural gas prices are at highs not seen in nearly a decade.

Ed Longanecker, the president of the Texas Independent Producers and Royalty Owners Association, tells NGW that anti-oil and natural gas policies are not only job killers, but also raise costs for consumers.

But despite the signalling, the US remains a net exporter of crude oil. Its main foreign crude oil supplier, meanwhile, is Canada. Saudi Arabia, the de facto head of OPEC, is the third-largest crude oil exporter to the US economy, but accounts for only about 7% of total exports.

US natural gas, meanwhile, is finding its way to the foreign market in LNG form and these exports that are expected to easily exceed piped shipments in the future.

That natural gas is competing with global suppliers, such as Russia. That has shifted the foreign policy narrative somewhat too. Russia’s Nord Stream natural gas pipeline to Europe was seen initially in some circles as a boost to European energy security because it avoids geopolitically sensitive territory in Ukraine. But the second leg of that pipeline, which is nearly operational, has become more of a source of concern in Washington as US LNG supplies increasingly find their way into Russia’s backyard.

Those two issues – a net exporter of crude oil and increased LNG exports – show that, despite domestic policies, commodities are part of an interdependent world. Political scientists Joseph Nye and Robert Keohane saw two interesting aspects to interdependence; vulnerability and sensitivity.

Sensitivity relates to the degree to which changes in one country impact the other. Policy decisions from OPEC and its other allies in the larger OPEC+ cartel drive the price of oil, which trickles down to consumers in the form of gasoline prices. The US economy – only if entirely independent from foreign supplies – will remain sensitive to OPEC+ decisions for the foreseeable future.

Vulnerability, Keohane and Nye argue, is far more damaging. Vulnerability relates to available options.

“Two countries, each importing 35% of their petroleum needs, may seem equally sensitive to price rises; but if one could shift to domestic sources at moderate cost, and the other had no such alternative, the second state would be more vulnerable than the first,” they wrote in their seminal Power and Interdependence: World Politics in Transition.

The Arab oil embargo from the 1970s exposed US vulnerability to OPEC supplies. That vulnerability perhaps now rests with Canada, which is interconnected to the US economy by way of oil and natural gas pipelines.

With US crude oil production rivalling that of Russia and Saudi Arabia, and with natural gas impacting the energy security equation overseas, US domestic policy has foreign policy ramifications. The reverse holds as well - Russian and Saudi energy decisions, also have global repercussions.

So unless a nation is entirely self-reliant, both components of independence – vulnerability and sensitivity - exist. Both US oil and natural gas production are increasing, even as the federal government moves along the pathway of the energy transition. No nation, however, is insulated from global affairs. So long as that remains the case, there is no domestic policy that can change the equation.