Guest post by Tilak Doshi , originally posted at Forbes
“On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking—everywhere.” So tweeted Elizabeth Warren, the likely Democratic presidential nominee. (Fracking combines horizontal drilling and hydraulically-fracturing shale rock with high-pressure liquids to force open existing fissures and extract “unconventional” oil and gas.) In the intention to ban all fracking in the US, she joins Senators Bernie Sanders and Kamala Harris, her fellow presidential candidate hopefuls. In the demonization of fossil fuels and support for some variant of the multi-trillion dollar “Green New Deal”, Warren is not alone among the candidates running in the Democratic presidential primary. Nearly every nominee for the Democratic primary, including the other leading contender Joe Biden, has signed on to Alexandria Ocasio-Cortez’s grand plan to save the planet from a 12-year deadline to global extinction.
What the fracking revolution wrought for Asia
The rapid growth in U.S. unconventional oil and gas production is unprecedented in the history of the industry. According to Fatih Birol, Executive Director of the International Energy Agency, “The remarkable ability of [US] producers to unlock new resources cost-effectively pushes the combined United States oil and gas output in 2040 to a level 50% higher than any other country has ever managed. This is an impressive feat, which cannot be overstated. This makes the United States the undisputed oil and gas producer in the world over the next several decades.” The phenomenal surge in US oil and gas production has been transformational in its impact on global markets. It has probably brought about the biggest transfer of wealth in history.
US crude oil production has more than doubled in a decade. By mid-2019, US production was rated at over 12 million b/d, surpassing Russian and Saudi Arabian output as the world’s largest. Academic models suggest that oil prices are up to $40 – $50 per barrel lower than they would have been were it not for the US fracking revolution. Benefits have primarily flowed to China, India, Japan and South Korea which constitute four of the world’s five largest oil importers (the US itself being one of the top five), largely at the cost of reduced oil revenues to OPEC and Russia. Given Asia’s oil consumption of almost 36 million barrel per day in 2018, the region’s consumers would have saved over $325 billion dollars annually if crude oil prices were lower by just $25 per barrel due to the US production boom.
According to consultants IHS Markit, the shale gas revolution in the U.S. “will drive prices down to a level not seen in 40 years and open wider the world of energy export possibilities”. As the US emerges as a major exporter of liquified natural gas (LNG) over the next few years, competing with the world’s leading suppliers Qatar and Australia , it is helping to integrate what were previously regionally disparate markets in Europe, Asia and North America. Benefits to Asian markets for natural gas will also be substantial, not only via lower prices but also in their aims to diversify their sources of energy imports and reduce their dependence on the Middle East suppliers.
Impossible Promises by Democratic contenders in the US Primary
Fanciful policy promises by politicians in the election trial are nothing new. The Democratic Party presidential primary debates to date have more than lived up to such billings. The one-upmanship in issues of climate and energy policy, for instance, has been nothing short of incredulous to any objective observer not fully convinced of an impending planetary apocalypse. But Warren is anything but shy: “Taking bold action to confront the climate crisis is as important – and as urgent – as anything else the next president will face. We cannot wait”
Outlawing fracking and imposing a complete moratorium on oil and gas drilling offshore and on public lands, to be sure, will require contentious legislation at various levels of government. They will also spur litigation challenges from investors, oil and gas companies and state governments heavily dependent on oil and gas activity for their revenues and hence votes.
Constitutional limits on the US president’s power are real and binding. For instance, outlawing an entire technology (fracking) might require an act of Congress. If the Republicans retain majority control of the Senate, anti-fossil fuel legislation such as those proposed by Warren would not be passed. But even if the Democrats manage to flip the Senate, moderates in oil and gas states such as Colorado, New Mexico and Texas would find it difficult to knee-cap their own vibrant jobs-providing and tax-paying industries.
Yet, the promises by Warren are spooking investors in the US oil and gas patch. A President Warren could take executive and regulatory actions aimed at ending fracking and all oil and gas activity in federal lands for example. A weaponized Environmental Protection Agency – taking President Obama’s playbook – could discourage the fossil fuels sector in countless ways through administrative and regulatory choke-holds. A climate change-impelled president could “vaporize the oil and gas boom in the United States”, as succinctly put by Bob McNally, head of the Rapidan Energy consultancy.
Asians can only wait and see
A left-wing Warren presidency would curtail US fracking and oil and gas output from federal lands, leading to higher global oil and gas prices. Energy imports are among the largest components in the balance of trade of most Asian economies. Already afflicted by a global economy in the throes of a “synchronized slowdown”, they can ill-afford higher oil and gas prices.
The IMF recently downgraded its growth forecast for 2019 to 3 percent, its slowest pace since the global financial crisis. In this context, significantly higher oil prices would hit vulnerable Asian economies with weak current account balances such as India, Indonesia and the Philippines with inflation, weakening currencies and lower growth outlooks. Even China, with its slowest growth rate in nearly 30 years and an “evaporated” current account surplus, would not be spared from the knock-on effects of higher energy import prices.
It might be argued that a Trump loss in 2020 would help Asia. This outcome, as the reasoning goes, would lead to a more “normal” world without the travails of a transactional US foreign policy and an “America First” approach to international economic relations that have characterized the current administration. Yet, given Asia’s voracious appetite for imported oil and gas, its leaders know full well that it is President Tump alone that stands for a world of energy abundance. The evermore extreme leftward lurch of the current crop of Democrat presidential hopefuls attests to this. Asian leaders should be careful what they wish for.