Taking the lead: the US' newfound role in energy markets and what it entails for the region

Published July 21st, 2014 - 02:10 GMT
Now with crude output in the country growing rapidly and the US emerging as the world's top producer, there seems growing emphasis in Washington on controlling the newly found resource
Now with crude output in the country growing rapidly and the US emerging as the world's top producer, there seems growing emphasis in Washington on controlling the newly found resource

An exciting new debate is brewing in Washington.

For years, rather decades, the US has been discouraging the very concept of resource nationalism, insisting instead to let free market forces control the global energy dynamics. It has always been opposed to using resource assets as a foreign policy tool. For this was the only way to ensure stability in markets, Washington kept sermonizing all these decades.

Now with crude output in the country growing rapidly and the US emerging as the world's top producer, there seems growing emphasis in Washington on controlling the newly found resource - and use it as a foreign policy tool - setting aside the very argument of free market economy.

What a turnaround indeed!

At the EIA's 2014 Energy Conference held last week at the JW Marriott Hotel in Washington, challenges haunting the policymakers and the energy markets, were discussed, debated and argued in detail. With more than 900 thought leaders from industry, government, and academia turning out, the conference provided a wonderful window to understand and comprehend the undercurrents impacting the US and the global crude industry -  today.

Artificial market barriers are preventing the United States from using energy as a tool for international diplomacy, US Rep. Fred Upton, chairman of the House Energy and Commerce Committee said.

"It's a new era of energy abundance, and we need to usher in a new era for energy policy (to match)." The Republican from Michigan emphasized that those in the world with energy have the power to influence global affairs. He pointed to Russian gas supplies for Europe and conflict in Iraq and Libya as examples. We have (finally) an opportunity, Upton said, to use energy as a diplomatic tool and ensure US allies gain access to US oil and gas reserves rather than being "held hostage" to global instability. “We can take care of our domestic needs and have enough energy left to let our allies buy it from us, rather than being held hostage to unstable regions of the world.”

He hence urged the US government to drop many of the policies adopted in the 70s and instead embrace its newfound energy wealth – including unleashing “energy diplomacy” on world stage.

Others too expressed similar sentiments, though more with a market perspective. Their reasoning for opening the taps to the world was not necessarily to 'unleash energy diplomacy,' but to let market forces play their due role.

Continuing the crude export ban doesn’t make sense because the US has spent decades fighting resource nationalism in other countries and promoting free trade, Jason Bordoff, of the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs pointed out.

During discussion, Bordoff added “many people are concerned that if more US crude exports aren’t allowed, refineries will be so overwhelmed with domestic light crude that they’ll deeply discount the prices they’re willing to pay.

The US could find its light crude oil production growth stymied if it doesn’t allow more of it to be exported, others warned. A "day of reckoning" is approaching, underlined John R. Auers, executive vice-president of Turner, Mason & Co. Consulting Engineers. This day would come, he said, when US crude production exceeds refining capacity to a point that prices become so heavily discounted to comparable overseas grades that producers decide not to increase production further.

IHS Vice-Chairman Daniel Yergin, at times termed as the rock star of the global energy world, too agreed. “The rationales for a crude oil export ban are gone, but the ban is still in place,” media quoted him as saying. “We see a risk of a $15-25/bbl domestic light crude discount being locked in during the next couple of years, potentially limiting additional investment.”

Yergin then added: “Lifting the ban on crude oil exports would signal the US government’s commitment to global markets and energy security. The US has preached to other countries for decades about the need for free flow of resources. How can we say to Japan that it can’t import any of our LNG but must not buy Iran’s oil?”

While the ongoing shale revolution has definitely provided a sense of energy security to the US Maria van der Hoeven, executive director of the International Energy Agency (IEA) cautioned that the optimism about US energy security, rooted in abundant supply of fossil fuels alone, is misplaced. “Energy security really requires diversity,” she underlined. Her message was clear. “Coal, nuclear and wind are all essential for keeping the lights on.” The traditional definition of energy security, entrenched in “security of supply of fossil fuels is woefully outdated,” she argued. “Although things look bright (at the moment), this is no time for complacency.”

And she had reason too. US light tight oil production will reach a plateau over the next decade, which means the US will be forced to rely on the Middle East, she argued. And the focus will particularly be on turmoil-stricken Iraq, which the IEA projected would provide up to 60 percent of the Organization of the Petroleum Exporting Countries’ capacity growth over the next five years.

Van der Hoeven also urged the US, the world's leading consumer, to step up efforts to limit the impacts and costs of climate change. The Environmental Protection Agency’s (EPA’s) rules alone are not “compatible with minimizing the global temperature rise to 2C.” Renewables and energy efficiency “may well need to take center stage, but real action is required on (carbon capture and storage) and other low-carbon technologies to pave the way for oil, gas, and coal to play a full role in a secure global energy system for decades to come.”

Van der Hoeven also dispelled claims that gas, which has displaced substantial amounts of coal, is beneficial to climate change mitigation. She said: “Let me be clear: Gas may be the cleanest of fossil fuels, but it is still a fossil fuel.”

Antoine Halff, the head  of the International Energy Agency’s Oil Industry and Markets Division, pointed at the shifting trade from crude to products globally. The IEA's midterm Oil Market Report forecasts “a very dramatic refining transformation in the next 5 years” with “very significant growth in Asia, particularly east of Suez, and relatively minor growth in Latin America,” he told the conference.

Energy markets are changing. The US energy outlook is in transition. And a lot needs to be done. US, the world's largest crude consumer, needs to take a lead, not only in conserving climate but also in ensuring that free market economy rules the markets. The will for this however seems subdued - at least at this moment - in Capitol Hill, if not in White House.  

By:Syed Rashid Husain

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