by Stewart Fleming
European Voice

The United States is shedding its troublesome dependence on imports of foreign energy at an accelerating pace. The consequences will transform the role that the US plays in the world.

President Jimmy Carter declared in April 1977 that curbing the United States’  dependence on foreign energy imports was essential to “avoid a national catastrophe”. This task was, he said, “the moral equivalent of war”.

The national catastrophe did not take place. But for 40 years the US’s excessive dependence on imported oil has played a central, sometimes damaging, role in shaping the American economy and its foreign policy (including decisions on war and peace) and has contributed to the erosion of its global stature.

In the past four years, however, the picture has begun to change. US energy output has risen and demand has shrunk. In his State of the Union address last month, President Barack Obama noted the transformation. “We are finally poised to control our own energy future,” he said.

Edward Morse, an economist at Citigroup, the giant US bank, has put a date on what he calls ‘energy independence day’. By 2020, he says, oil production in the US and Canada, perhaps even in the US alone, could be “in surplus of projected needs”. This will have, he adds, “a tangible impact on global prices and trading patterns and will eventually turn the global geopolitics of energy on its head”.

Separately, even the cautious International Energy Agency, the official intergovernmental energy watchdog, has predicted that by 2017 the US could overtake Saudi Arabia and Russia as the world’s top oil producer, by 2020 it would produce so much natural gas that it would be exporting its surplus, and by 2035 it would become a net oil exporter.

In October 2006, US oil imports peaked, hitting 12.6 million barrels per day (mbpd) and the US’s trade and current account deficit for the year hit $800 billion, a threatening 6% of gross domestic product (GDP). Even in 2011, the International Monetary Fund (IMF) was predicting net annual foreign oil imports of more than $300 billion a year in 2011-16.

Instead, imports are falling, now down to under 7mbpd. Partly as a result, the IMF projects a US current account deficit of only a little over 3% of GDP in 2017. This represents a significant contribution to reducing destabilising global current-account imbalances.

What does this mean for Europe? In part it is good news. Official forecasters have, for several reasons, been underestimating the strength of the US economic recovery, for reasons that I explored here on 29 November 2012 (“The great global rebalancing act”). One is that they have paid too little attention to the impact of rising US oil and gas production. The development of the (environmentally controversial) technology to exploit vast reserves of unconventional shale gas and oil has meant, for example, that wholesale gas prices in the US have slumped, running at around half of European levels and one-fifth of Japan’s.

Global (and therefore US) oil prices have been stable partly because of US supply-and-demand trends. American investment in job-creating energy production and transportation (including rail), and in energy-intensive industries, is rising, helping to drive the broader economic recovery.

Europe will benefit from stable oil prices and a stronger US economy. Global gas prices are expected to converge as US supplies – and exports – rise. The US may not assume from Saudi Arabia the mantle of the swing producer, able to tap available reserves to balance the global supply and demand for oil. But the brittle cohesion of the untidy OPEC oil price cartel is likely to be further undermined, heralding an era of lower and more stable oil prices.

It may also be that looming US energy self-sufficiency will help to launch a new era of dollar dominance and strength, a potential relief to European exporters.

But there are always unanticipated downsides to rapid transformations.

The US could, again, fritter away its good fortune. There is a risk that reduced dependence on foreign oil will strengthen isolationist and populist sentiment among voters and on Capitol Hill, and will further diminish Washington’s interest in activist diplomacy, especially in the Middle East. It may intensify its focus on Asia, where energy exports could be headed and China looms large.

Lessons for Europe

So could Europe match the US’s technologically driven energy market transformation? Cannot Europe apply the same ‘fracking’ techniques that have opened up new gas and oil reserves in the US and Canada?

Even two years ago there was a degree of optimism on this score. Poland, it was thought, might harbour vast harvestable unconventional gas reserves. Last year, however, Exxon Mobil, the big US energy group, halted its unsuccessful Polish exploration operations. This was a bad sign, especially for a country which has a toxic relationship with Russia, a major EU energy supplier.

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