How American energy independence could change the world

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A person dressed up in a Statue of Liberty in front of a US flagImage source, Reuters
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Energy independence would allow the US to reassess its role on the world stage

If the bookies are to be believed, Chelsea Clinton could turn out to be luckiest US president in history.

The holy grail of American leaders over the past four decades, from Richard Nixon to Barack Obama, has been energy independence, and thanks to shale oil and gas, the dream could soon become reality.

The International Energy Agency (IEA) and oil giant BP certainly think so - they believe the US will be energy independent by 2035.

As Mr Obama said in his State of the Union address last year: "After years of talking about it, we are finally poised to control our own energy future."

No-one is suggesting America will stop importing power overnight, but being largely self-sufficient in energy could have widespread implications not just for the US, but for the rest of the world.

US economy

Last year, the United States spent about $300bn (£180bn) on importing oil. This represented almost two-thirds of the country's entire annual trade deficit. Oil imports are, therefore, sucking hundreds of billions of dollars a year out of the US economy.

As the IEA says, a persistent trade deficit can act as a drag on economic growth, manufacturing and employment.

If the US achieved energy independence, not only would the country spend far less on cheaper, domestically generated power, but the money would be going primarily to US-owned energy producers.

The US's oil import bill also constitutes about 2% of the country's annual economic growth. As the US economy averages about 2% growth a year, the country would, in effect, be getting a year's growth for free.

Paul Dales, at Capital Economics, argues that as this would be spread out over the next 10-20 years, the annual benefits would be much smaller - in this instance, 0.2%-0.1%.

True, but comparing now with energy independence, the boost to the US economy of ending oil imports would be significant.

US manufacturing

Energy independence will come about only through cheap and abundant shale oil and gas, which could help spark a golden age for US manufacturing.

US energy prices are far lower than those in Europe and Japan, and this fact - together with rising wages in China and the increasing productivity of US factories - means a number of US firms are looking to bring production back home - a process known as reshoring.

Several companies, including Dow Chemical, General Electric, Ford and Caterpillar, have announced hundreds of millions of dollars of investment, either in new plants or in re-opening shutdown facilities. Even Apple has announced a new factory in Arizona more than a decade after closing its last US plant.

In fact, between 2010 and the end of March 2013, almost 100 chemical industry projects valued at around $72bn were announced, according to the American Chemistry Council.

Indeed a study by accountancy firm PricewaterhouseCoopers estimates that one million manufacturing jobs could be created by 2025 thanks to low energy prices and demand from the shale gas industry. Further analysis by the Boston Consulting Group points to a surge in US exports of manufactured goods.

Image source, Reuters
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Many economists believe shale will spark a renaissance in US manufacturing

Any boost in production to US manufacturing would obviously lift overall economic growth even further. In fact, the benefits are already being felt - many economists point to cheaper energy as one reason why the US has outperformed in recent years.

European manufacturing

Only four years ago, Europe's gas prices were roughly the same as those in the US. Now they are three times higher, and the IEA forecasts they will still be twice as high by 2035.

Next year, Boston Consulting expects the US to have an export cost advantage of between 5% and 25% over Germany, Italy, France, the United Kingdom and Japan in a range of industries, including plastics and rubber, machinery, computers and electronics.

In fact, a number of European companies are already looking to invest heavily in the US. Royal Dutch Shell has announced a new chemical plant in gas-rich Appalachia, French industrial giant Vallourec recently invested more than $1bn in a new plant in Ohio, while Austrian steel group Voestalpine is investing $750m in a new factory in Texas.

The danger is not lost on European politicians.

Last year, European Council President Herman Van Rompuy announced that: "All leaders are aware that sustainable and affordable energy is key to keeping factories and jobs in Europe. Industry finds it hard to compete with foreign firms who pay half the price for electricity, like in the United States."

The European Commission has even talked about the "de-industrialisation of Europe" due to higher energy prices.

Oil exporters

A number of countries export huge amounts of oil to the US; exports that would all but disappear if the US achieves energy independence. The impact on these economies, particularly in South America, Africa and the Middle East, would be significant.

For example, in 2011, Ecuador's oil exports to the US were worth about $6.5bn, or 8% of the country's GDP. In Colombia the figure was 7%.

Even Canada, one of the world's economic powerhouses and a member of the G8, would be hit hard. Again, of course, the loss would not be felt overnight.

But it's not just direct exports to the US that would be hit. America is currently the world's biggest importer of oil, so if it was no longer buying, the oil price would inevitably drop. This would hurt all oil producers, and compound the problem for big exporters to the US.

This "double whammy would result in a transfer of wealth from producer to consumer countries", Mr Dales explains.

Geopolitics and the Middle East

With energy independence secured, America's interest in oil in the Middle East would inevitably wane. Much depends on your own view of how important oil is to US foreign policy, but some commentators have compared American policy in Syria, a relatively minor oil producer, with that in Iraq, one of the biggest producers in the world.

You only have to look at Europe's reaction to Russia's move into Crimea to see how intertwined energy security and foreign policy are - with Russia supplying about a third of Europe's energy, EU leaders' hands are, to a large extent, tied.

Whether oil is the most important driver of US foreign policy in the Middle East is a moot point.

"Oil is a very important aspect of US interests, but you can't ignore the others," says Alexia Ash at IHS.

She says the US is very concerned both about stability in the region, particularly as it borders both Russia and China, and its image as a global superpower. The US also has strong historical ties with Saudi Arabia, including lucrative defence contracts. Others argue the US is already starting to withdraw from some of its overseas interests.

As Ms Ash asks: "If the ideological battles are lost, does the US start to retreat into its own shores?" Energy independence allows it to do just that.

Image source, Getty Images
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Fracking is now commonplace in the US, despite some environmental concerns

The environment

Overall CO2 emissions in the US have been falling since about 2008, barring a small increase in 2010, and are now back to levels seen in the mid-1990s. The reason is the huge rise in the use of shale - which accounts for one-third of US gas production and almost a quarter of oil production - at the expense of coal, which is generally considered to be more polluting.

This may be good for the US, but not for Europe, which has increased imports of the cheap US coal ousted by shale.

But environmentalists have a more fundamental reason to be wary of the rise of shale - it may be less polluting than coal, but it is far more polluting than renewables such as wind and solar.

If the US's reliance on shale continues to grow, and if investment in renewable energy is diverted as a result, then longer-term emissions will be higher than they might otherwise have been.

Remember also that shale oil and gas are finite fossil fuels. If the US is to achieve energy independence in perpetuity, it will need to do so using renewables.

This article is the first in a series of features on the future of energy. The next, published on Monday 7 April, will look at whether the US shale gas revolution can be replicated around the world.

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