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Shale, Shale Everywhere – The Geopolitical Game-Changer?

October 3, 2011

Over the past two weeks, extravagant claims about shale oil and gas reserves in various parts of the world have kept popping up on my radar.

First, a British exploration company claims that there are reserves of shale gas in the north-west of England comparable to the gas reserves of exporting countries such as Venezuela. Next, the excellent Crossroads Arabia highlights the existence of shale oil in the US state of North Dakota that could boost the US’s oil production capability above that of Saudi Arabia within the next five years. And finally I happened upon an article on the BBC website about massive shale oil deposits in Israel that could make that country energy self-sufficient in fairly short order.

I’m not an energy analyst or a petroleum engineer, so I can’t comment on the feasibility of extraction, though the US’s exploration programme is well advanced and rapidly reducing the country’s dependence on foreign imports.

There are plenty of opinions to be found about the geopolitical implications of shale discoveries. But I find that speculation about the longer-term outcomes is in short supply. So for what they are worth, here are the thoughts of someone who is expert in nothing but curious about most things.

In each region “blessed” by such deposits there is heated debate about the environmental implications of recovering them. Whatever the rights and wrongs of the issue, I suspect that reasons of state will, in most cases, override concerns about combustible drinking water and rising sea levels. Faced with an uncertain global economic outlook, and the opportunity drastically to alter the balance of payments in their favour, I’m pretty certain that all states with the opportunity to exploit their shale deposits with take the view that “if we can, we will”.

Should that be the case, the outcome will not only be a gradual shift in relations between the major economic blocs – North America, the EU, Russia, China and the Middle East. For sure, the traditional energy powerhouses in the Middle East, Africa and the former Soviet Union will lose political leverage over those who have previously depended on their exports, as most analysts predict. But the bigger geopolitical picture will surely be that energy will – for the next half-century at least – cease to be THE dominant factor.

As the reports suggest, it’s possible that Israel, the UK, Poland and a host of other small countries will end up with deposits to rival those of the giant producers. If that’s the case, regional energy deals within economic blocs – the EU, for example, South-East Asia, South America and the Middle East – might become more important than deals between the blocs. Neighbours of similar size and political status will supply each other, rather than supping with the devilish great powers.

Should this be the case, and should a resultant glut decrease the purchasing power of the current oil and gas giants, how will the politics of the Middle East change? And if America finds itself self-sufficient in energy, what are the prospects that it will move towards isolationism, seeking to rid itself of its reliance on cheap foreign imports of food and consumer goods? Should that come to pass, what will be the effect on China, the supplier of so many of those goods? Where will Europe stand?

In the Middle East, much will depend on the long-term outcomes from the Arab Spring. One scenario could be that Egypt, regenerated by changes to its political system and benefiting from cheap oil from its neighbours, begins to vie with Turkey for regional hegemony. Meanwhile the Gulf States, no longer able to subsidise their people with handouts in order to fend off radical political change, may become increasingly politically unstable. Iran? One can only see trouble within and from an impoverished, nuclear-armed theocracy. Regime change is not inevitable, but highly likely.

As for Israel, newly self-sufficient in energy but encircled by hostile neighbours and lacking its previous support from an America that seeks to reduce its role as the world’s policeman, a change in stance leading to a regional settlement would surely be on the cards.

Much depends on America’s path over the next couple of decades. The US is wrestling with colossal debt, high unemployment and minimal economic growth. Cuts in defence spending of up to $1tn over the next ten years – to be imposed on the Federal Government by Congress – are in the offing. Should those cuts happen, America’s ability to police the seas and to mount costly expeditions in hotspots such as Iraq and Afghanistan will be curtailed.

Other nations, such as Russia and China, eager to expand – and in the case of Russia, re-establish – their global influence will fill the vacuum. Might America, under the influence of its right-wing ideologues, start retreating to its laager, renege on its agreements under the WTO rounds, and impose import tariffs on goods from outside a newly formed economic bloc consisting of the NAFTA countries and the nations of South America? Sabre-rattling in Congress yesterday over China’s alleged unfair practices suggests that the US might start erecting the barriers sooner rather than later.

America should be well capable of defending itself and absorbing large cuts in military spending if it reduces its global role. Should it gradually disengage from global trade agreements and start relying on suppliers in the Americas as its outsourcing partners, it can use its energy surpluses to create jobs through long-term capital expenditure on infrastructure, revive its manufacturing capability in areas protected by tariffs, and use its technical ingenuity to establish an economic hegemony over its partners in the Americas.

China would be left to consolidate its economic domination over Africa and South East Asia. The Middle East would remain a cauldron of competing influences, with India, Pakistan, Turkey, Egypt and possibly Russia as the main players. The uneasy components of this new world order would be Japan – which has regional ambitions of its own that will continue to rub against those of China – and, of course, Israel and Iran. Not to mention North Korea.

And what of Europe? If the EU collapses under the weight of its debt, will we see a Europe shorn of NATO attempting to maintain neutrality – a greater Switzerland if you like – but with little political clout and increasingly under the influence of its powerful neighbour in the East – Russia? Or will it fracture again down Cold War fault lines, with Western Europe maintaining close economic and political ties to the American bloc, leaving the Eastern Europeans to return to the bosom of Mother Russia? Or will the EU pull together into a more closely integrated political entity and take its place as a regional power in a multi-polar world order?

If energy leaves the table as a fundamental source of conflict, it will surely be replaced by other shortages that will be the future catalysts. They include food, water, minerals, and especially the rare metals that are essential components of the telecommunications and computer industries – over which China currently holds a 97% monopoly of supply.

Such massive movements of political and economic tectonic plates would be unlikely to come to pass without the danger of increasing tension and even conflict between old adversaries. The most likely protagonists could be Japan and China, China and Russia, India and Pakistan, China and India, Israel and Iran, and the latter two countries against any number of regional enemies. And could the US, despite its isolationist stance, resist putting its oar into any regional conflict that potentially threatens its safe haven?

I accept that there are many dangerous assumptions built into this rather gloomy view of the mid-term future. The biggest of them is that America will cut back on its global role, and that South America will find common cause with its northern neighbours. And probably second is that China will be able to maintain political stability in the face of a very uncertain economic future.

What is certain is that if these earthquakes do occur, they will not be simultaneous. Just as is the case today with the current financial crisis, there will be events that trigger political and economic re-alignments. Some will be violent and others more gradual. Some – black swans and tsunamis – will seemingly come out of nowhere.

I don’t pretend to be a deep thinker on geopolitical futures. Wiser and better-informed people than me are undoubtedly dreaming up and planning for variants of these scenarios as I write this. But of one thing I am very confident. The smelly, crumbly black stuff lying under rock strata in countries that previously had no expectations of energy self-sufficiency will create earthquakes. And they will be much larger than the geological grumbles arising out of efforts to extract every last joule of fossil energy from the ground beneath us.

The great thing about futurology is that you only need to be half-right to become a sage. But I’ll be dead by then, so why should I care?

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