Energy 2020: Independence Day

Global Ripple Effects of the North American Energy Revolution

Momentum toward North American energy independence accelerated last year well beyond the wildest dreams of any energy analyst and well above the forecast we made in our first Citi GPS Report: Energy 2020: North America, the New Middle East?

Although 2013 promises to see a stall that might last a couple of years on the natural gas side while markets await a significant uptick in demand, so far, the results have been stunning. In the decade through last year, power generation in the United States grew by 6%, but natural gas use as a feedstock for power generation grew by a phenomenal 47%, ending coals century-long domination in the sector. Over just the last decade, natural gas production rose by some 14-bcf/d, an increase of over 26%. Shale gas production rose during this half decade from 3.5-bcf/d to over 26-bcf/d, an increase in market share from 6.7% to 40% of total U.S. production, pushing out imports of pipeline gas from Canada and LNG from around the world.

But it is in crude oil where last year saw the largest single annual increase in liquids production in U.S. history. The robust growth in North American production over the last two years helped to keep a lid on oil prices globally as the level of supply disruptions from both OPEC and non-OPEC producers rose from their historical total of 400- to 500-k b/d to an average above 2-m b/d since early 2011. Starting this year, North American output should start to have a tangible impact both on global prices and trading patterns, and will eventually turn the global geopolitics of energy on its head.

The impact of this extraordinary production growth is becoming increasingly apparent and even if the growth rate subsides in the years ahead, the mushrooming impact of this growth will have dramatic consequences. A half decade from now, US and Canadian output will be in surplus of projected needs. Over the next five years, demand for natural gas in the US should catch up with supply, opening up unexpected opportunities in transportation and igniting a re-industrialization of the country. Because of changing dynamics in the spread of production of unconventional as well as conventional supplies and because of growing inroads that natural gas will have in displacing oil products in the transportation sector, OPEC will find it challenging to survive another 60 years, let alone another decade. The United States should see its role in the world as a singular superpower enhanced and prolonged. But not all of the consequences are positive, for when it comes to the geopolitics of energy, the likely outcomes are asymmetric, with clear-cut winners and losers.

The probability of North American energy independence is extremely high, but even the prospects of US energy independence are real. Burgeoning U.S. energy independence brings with it an opportunity to re-define the parameters of post-Cold War foreign policy and provides unexpected opportunities for the country’s foreign and trade policy.

The implications for the global petroleum sector — for trade, for shipping, for the relationships among crude oil streams — are also profound, as are the implications for oil prices, which will be weighed significantly by this profound change in the position of the United States. Perhaps the most significant change in store befalls the geopolitics of oil and natural gas, where there is a long list of winners and losers, and where win-win solutions for producing and consumer countries might well prove to be elusive and where bitter politics of adjustment could be another complicating element of the global geopolitical landscape.