Memo to US politicians: Don't overlook the power of energy
Viewing the U.S. from space at night, it appears that an enormous new city, rivaling New York in size, has suddenly sprung up in the Midwest. In reality, shale gas installations are lighting up the sky in North Dakota, a glowing reminder of how the U.S. shale revolution has transformed the domestic energy market. The windfall could reshape the global market as well, but only if Washington changes course and allows more exports, particularly to Asia.
For the past year, America has been the world's largest petroleum producer, outstripping Saudi Arabia. The country has produced more than the entire output of Europe, Central America and South America combined. The U.S. now has an excess supply of light crude oil, which cannot be effectively refined inside the country.
As for natural gas, prices have plunged to roughly $5 per million British thermal units, and the U.S. is projected to be a net exporter by the end of this decade. By 2040, the U.S. Energy Information Administration predicts that domestically produced natural gas will make up close to 40% of all U.S. energy production. The U.S. has made big strides toward energy independence, as its imports of both gas and oil have dropped since the shale boom started.
Yet the American government continues to restrict exports of both gas and oil. Currently, only countries that have free trade agreements with the U.S. can buy its natural gas. U.S. companies are prohibited altogether from exporting crude oil, except to Canada. These restrictions not only make no sense economically, they prevent Washington from employing a powerful tool to promote liberal values around the world.
If the U.S. government changed its export policies, it could help to create a market driven by liberal and democratic nations, breaking the hold authoritarian states have had on the planet's energy resources. Whether OPEC or Russia, nations around the world have had to deal with anti-democratic regimes to meet their daily energy needs, pouring hundreds of billions of dollars into the coffers of actors who regularly cause trouble on the global stage.
There is no better place than Asia to begin a new era of energy cooperation. Japan is the world's largest importer of liquefied natural gas, much of it from Qatar and Indonesia, and the third-largest net importer of oil. Since the Fukushima nuclear disaster in March 2011, Japan has gone almost entirely without nuclear power. This increased dependence on imports cost the country $250 billion in 2012.
South Korea is the world's second-largest LNG importer and still depends on oil for over 40% of its total energy consumption. Almost all of South Korea's oil is imported for refining; 85% comes from the Middle East.
India, too, is increasing its consumption and has become the world's fourth-largest overall net importer of fuel. The U.S. EIA predicts that, along with China, India will account for the majority of the growth in Asia's fuel imports over the next 20 years. Today, India is overwhelmingly dependent on coal, but oil makes up nearly a quarter of its energy consumption.
It is time for America to begin exporting its surplus energy supplies to Asia. It should begin with light crude oil, and then move to LNG, particularly once the country is no longer importing any natural gas. It takes millions of dollars and years to make terminals export-ready, so the process should begin now. Congress needs to pass a law repealing the "FTA only" requirement for LNG exports and speed up the process of approving sales to non-FTA countries.
The economic merits of such a move are obvious. While natural gas trades in Asia between $15 and $20 per million British thermal units, opening up the American export market would drive prices down, potentially saving tens of billions of dollars. That would help Japan and South Korea to recapitalize plants and infrastructure, and enable India to invest more in industrial modernization -- while allowing all recipient countries to reduce government deficits.
For Tokyo and Seoul, their export-driven industrial bases would benefit considerably from lower energy costs. As for India, reduced use of dirty coal would mean cleaner air, and affordable LNG could help the country bounce back from its recent economic slowdown.
The geopolitical benefits of U.S. energy exports are just as important. Allowing Japan and South Korea to tap into America's energy surplus would not only reduce their reliance on the Middle East and Russia but also lessen their concerns about shipping fuel through waters where China has been expanding its naval influence. This could ease maritime tensions that have caused these countries, as well as India, to invest heavily in naval power.
American politicians need to recognize that with energy, they have an opportunity to support allies, promote economic growth and maintain stability.
Michael Auslin is a resident scholar and director of Japan Studies at the American Enterprise Institute in Washington, D.C.