The United States’ Energy Revival
The Impact of Increased U.S. Energy Production on its Wealth and Power and
the Significance in Light of Challenged Hegemony
China and East- & Southeast Asia
Keywords;
U.S. energy, oil & gas, strategic energy policy, hegemony, East- & Southeast Asia
Master Thesis Political Science, UVA Amsterdam Research Project; The political Economy of Energy
Author; Supervisor;
Alf Sante Kuijer Dr. M. P. Amineh
Table of Contents
Chapter 1. ... 1
1.1. Objectives ... 1
1.2. Research question & Sub-questions ... 1
1.3. Social and Scientific Relevance ... 3
1.4. Delineation of research ... 3
1.5. Literature review ... 5
1.6. Research Design and Methodology ... 11
Chapter 2. Country Energy Overview and Profile ... 17
2.1. U.S. Oil History ... 17
2.2. The era after abundance; U.S. oil from the 70s till ‘07; ... 20
2.3. US energy since 2007; the impact of the revival ... 21
2.4. China; from autarkic independence to “going out” ... 22
Chapter 3. Theory of Hegemony & Change; The U.S. & China ... 24
3.1. Gilpin’s Grand Theoretical Framework ... 25
3.2. War, Order, and the Fundamental Problem of Change. ... 28
3.3. War, the Rise of the U.S., International Order and the Problem of a Rising China. ... 30
3.4. The Structure of Hegemonic Order; Concepts & Their Interrelations ... 32
3.5. Rise of China & the “Law of Uneven and Combined Development”... 39
3.6. The Main Problem of Political Economy of Energy and a Rising China. ... 42
Chapter 4. Impact of U.S. energy on Wealth & Power and Control over Order ... 46
4.1. The Drivers of the U.S. Energy Revival ... 46
4.2. The Value of Independence; The Coercive Power of Embargoes ... 48
4.3. Relative Power in the Energy Realm; the U.S. as a Major Producer ... 51
4.4. Structural Power; the Dollar and the Oil Market ... 56
4.5. A Changing Energy Landscape; Possible Impact & Unintended Consequences ... 64
Chapter 5.1. Maritime Geography, Energy Supply Security & Naval Power ... 68
5.1.1. Three core Geographical Concepts and Energy Supply Security ... 68
5.1.2..Regional Hegemony, Command of the Commons & Naval Capability ... 71
Chapter 5.2. The Case of Chinese Shale; Competition or Cooperation? ... 76
5.2.1. Oil versus Gas Potential. ... 77
5.2.2. Cooperation; Assessing the Balance ... 78
Chapter 5.3. LNG; Direct External Governance; Export & Market Maker ... 81
5.3.1. Market hubs ... 81
5.3.2. Japan. ... 82
5.3.3. China ... 84
5.3.4. Singapore & ASEAN ... 84
Chapter 6. Conclusion and Discussion ... 88
Abstract
The U.S. has in the last decade become the largest producer of oil and gas combined. This was brought about by usefully applying new technologies to vast amounts of hydrocarbon resources trap in shale rocks previously deemed irrecoverable. The phenomenon has been dubbed the “U.S. energy revival” and is one of the greatest production increases of oil and gas recorded in history. This thesis studies the impact of this energy revival on the wealth and power of the U.S. of which is argued that it can aptly be described as the current hegemon. After the Cold War, the U.S. had a free hand in shaping the international system to its wishes and interests. The impact of U.S. increased energy production will be studied in light of this advanced order, also called the liberal order. For this, the framework provided for by Robert Gilpin in his book War & Change in World Politics will be used. It is argued that energy independence for the U.S. is not the most important political consequence of increased production. Rather, it is the fact that it is now among the top three of major producers of oil that makes major suppliers more competitive, leaving less room for them to set prices in their favor that has been the decisive consequence of U.S. increased production. This thesis also places the U.S. energy revival within a frame of contended hegemony by the rise of China. China’s rise is accompanied with an insatiable appetite for energy of which oil is the most important one, necessary to power industrialization and ascendency in the global ranking of power and prestige. In order to secure energy supplies China has embarked on a sophisticated mix of policy tools and instruments, that, is argued, poses a threat to the U.S.’ current position. The possibility of America’s new energy capabilities, among which shale extraction technology and LNG exports, being used to in somehow influence the change occurring in the system is analyzed. It is concluded that it is hardly possible to influence or steer China’s behavior, especially since most of U.S. potential tools apply to natural gas and not oil. Natural gas and LNG are of less strategic importance than oil. For the U.S. the best way to guard against the systemic threat of Chinese energy policy is by securing naval supremacy. This is however independent of U.S. energy.
Acknowledgements
To start, I want to thank Dr. Mehdi Amineh for letting me into this research project. To do a research project that is close to my interests is of great importance to me. I have thoroughly enjoyed the classes, and am grateful for the guidance, and especially honest commitment and dedication in navigating me to the desired end. I also want to thank Henk Houweling in advance for being my second reader.
Maps United States
Maps of Asia and East- & Southeast Asia
List of Tables and Figures1
Table 1. 1. Neorealism, Hegemony Theory and Economic Liberalism ... 7
Table 3. 1. Motivations and strategies of NOCs in investing abroad ... 43
Table 4. 1. A History & Evaluation of Embargo's ... 50
1 Unfortunately, inserting a table of my figures resulted in gross distortions in my document and is therefore omitted.
List of Abbreviations
ASEAN Association of Southeast Asian Nations b/d Barrels per day
CNOOC China National Offshore Oil Corporation DOE Department of Energy
EIA Energy Information Administration
EU European Union
GDP Gross Domestic Product IEA International Energy Agency IOC International Oil Company IPE International Political Economy LNG Liquefied Natural Gas
Mb/d Million Barrels per Day NOC National Oil Company
OECD Organization for Economic Cooperation and Development SOE State Owned Enterprises
Tcf Trillion Cubic Feet USD United States Dollar
Chapter 1.
1.1. Objectives
The main goal of this thesis is to study the impact of increased production and reserve estimates of energy2 (oil & gas) in the United States. In the last decade the U.S.’ energy
picture has vastly improved due to technological advances made in extraction methods. This phenomenon is also called the “U.S. energy revival”3. This research will consist of two parts;
the first part will study the impact of this energy revival on U.S. wealth and power and the second part will explore developments in, and possibilities of this new resource and accompanying capabilities being used in external relations and governance towards East- & Southeast Asia where potential peer-competitor China is located. Hegemonic governance is needed, it’s claimed, because China’s rise is accompanied with a sophisticated mix of policy tools and instruments to secure China’s increasing appetite for energy, that in turn, could transform U.S. advanced order4 and bring in jeopardy its current position.
1.2. Research question & Sub-questions
The main research question is;
What is the impact of the U.S. energy revival on its wealth and power and can it be used for exerting hegemonic governance in East- & Southeast Asia?
This question consists of two components. The first part aims to study the impact of increased production of oil and gas in the United States. The focus is on what has happened in the last decade and how it has influenced U.S. power position within the globe and in its advanced order. The second part seeks to place this occurrence within the context of the proposed hegemonic challenge the U.S. faces with the rise of China.
2 from now on energy will always refer to oil & gas
3 This term is also used in the U.S. National Security Strategy of 2015 and will be used in this thesis. Compared to the two other descriptions; the U.S. energy revolution and the U.S. energy renaissance, it is the most neutral description.
4 The term “U.S. advanced order” will be used quite frequently and is chosen to denote the fact that order is an act of exertion, and deliberate structuring. “Liberal order” might also be used but has more of a connection to liberalism than realism, the main paradigm of this thesis.
Sub-questions
The sub-questions help to answer the main question and are asked in the actual order and structuring of parts I intend to answer them.
Chapter 3. Explaining change occurring with the rise of China; the hegemonic cycle &
components of international system (no hypothesis)
- Can the of U.S. still be considered a hegemon according to the model that Gilpin
provides, and how can we conceive the challenges between the U.S. and China?
- What is the nature of the change occurring within the international system and how
does it relate to the domain of energy?
Chapter 4. Study on the energy revival and its impact on U.S. wealth and power
- What were the conditions and/or policies that gave have led to the U.S. energy revival?
- What has been the impact on U.S. increased energy production on the energy market and what is the political meaning thereof?
- What has been the impact of the U.S. energy revival on the U.S. Dollar, and does a possible relation enhances the structural power of the Dollar?
- How has the energy landscape changed and what are possible consequences & unintended consequences of the current lower energy-price environment?
Chapter 5. U.S. energy placed in the context of hegemonic challenge by China
- What role does naval power and regional hegemony play in attaining energy-supply security for China?
- What benefits and what downsides are there of cooperating with China in the energy realm?
- What strategic role can LNG play in structuring regional energy affairs in East- & Southeast Asia?
1.3. Social and Scientific Relevance
The U.S. has in the last decade become the largest producer of oil and gas combined thereby joined the energy-superpowers Saudi Arabia and Russia. Although the U.S. still consumes just more as it produces and is thereby not an exporting energy power, it has had a profound impact on the global energy outlook and hydrocarbon prices. The NY times speaks of a “new balance of power” referring to the relative decline of Russia and OPEC to raise global energy prices by cutting production.
Another interesting characteristic of this revival is that it has been driven by technological development/innovation, Yergin calls it a “revolution” that has changed the energy landscape. Indeed he argued that data has consistently better than expected and the market, even when taken into account lower energy prices, is very resilient (2011:327).
Pertaining to the rise of China this thesis seeks to clarify Chinese energy policy which has been dubbed by Zoellick as neo-mercantilist by placing it within the hegemonic power-transition theory proposed by Robert Gilpin. Gilpin’s work War & Change in World Politics is arguably not that well known because it was published only two years later than Waltz’s seminal work Theory of International Politics. This is a great shame for the work provides for lot of insight into the workings of world order in combination with the political economy.
1.4. Delineation of research
Space. The U.S. and its order
As the U.S. is a global power the confines of its reach is hard to determine. The main proposition of this thesis is that the U.S. has arisen to prominence trough historical conditions, one of which is war. War is followed by a peace-settlement and the creation of new institutions, that in turn are the hallmarks of the political order created after victory. Hence to conceive of U.S. power in relation to world order one need only trace back time. First it consists of allies, and the main ones are, Europe and Japan in East Asia. Out of these allies arose the OECD and the Bretton Woods agreements and institutions, that oversaw the re-industrialization of the defeated and ruined powers. The OECD in turn, consisting of the major Western industrialized powers was the major “energy consuming block” of confronted by the oil crisis in the 70s and the creation of OPEC, which gave rise to institution as the Energy Information Administration (EIA) and the International Energy Agency (IEA).
Space. East- & Southeast Asia
The second empirical part of this thesis (Chapter 5) will focus on East- & Southeast Asia which is the region where the U.S.’s potential peer competitor China is located. The region East- & Southeast Asia comprises East Asia where Japan and China are located, and Southeast Asia, roughly the nations around the South China Sea. Southeast Asia has no great powers and is therefore of less important in the grand scheme of things. However most energy supplies either come from-, or are shipped through this region. Hence this part is added because of its significance in energy politics, including Chinese naval strategy. In the region as a whole LNG trade and deliveries have historically been well developed, because Pacific nations and Australia produce it.
Time frame. U.S. energy revival (last decade)
The time frame is the last decade, beginning from around 2007, when U.S. energy production started to increase considerable. Trends of the last decade will be compared with identified trends in the preceding period. The recent trends also provide for an indication for looking at the possible impact of the U.S. energy revival with a forward looking basis, deemed possible by neoclassical realism, which will be discussed in the Literature Review. A forward looking basis refers to the foreseeable future no further than a decade, of which we have an indication by following established trends.
1.5. Literature review
Because the U.S.’s far reaching scope it is imperative to conceptualize its position in a way that takes into account global power dynamics and changes—by which is meant the realist notion of the balance of power—and, the structure of the global market-economy that entails the study of International Political Economy (IPE) defined as “the parallel existence and mutual interaction of ‘state’ and ‘market’ in the modern world” (Gilpin 1987:8). It is clear from these preferences that realism, as a state-centric theory, might be well-suited for this study. However, there are different strains of realism where within (more often than not) a comprehensive explanation of the notion, or, phenomenon of international change is lacking, and a well formulated (sub)theory for understanding the modern international economy, that is highly interconnected, is missing. Indeed, one could say that liberalism,5 as realism’s main
contending paradigm has been far more powerful in explaining these phenomena. To get a better handle on the theoretical position of this thesis Gilpin’s formulation of realism that incorporates both the balance of power and the role of IPE in explaining the rise and fall of
hegemonies will be placed between neorealism and liberalism, which, because an emphasis
will be put on economics, will be called “economic liberalism”. This is presented in Table 1.1. where we see that neorealism is quite static and provides little answers to how change in the international system occurs. Economic liberalism on the other hand, does have a notion of change but is to “a-political”. Gilpin’s realist theory of change incorporates concepts from both paradigms mainly through the incorporation of Marxism.
Hegemony & Power transitions
The problematic of power transitions lie at the heart of realism stemming, for the most part from the historical treat of Thucydides who recorded—in true realist style—the Peloponnesian War.6 Power transition theory differs from pure cyclical theory that is marked
by “waves” of specific time periods. Kondratieff claimed that there have been three major
5 And its theoretical off-shoots
6 Thucydides alluded to several major themes that in our contemporary time are still relevant and debated. He highlighted the importance of the change in relative power, argued that the Spartans and Athenians had different
social and political structures—ancient aristocracy and democracy respectively—that made the struggle one for
“keeping one’s way of life”. Thucydides also expressed profound scepticism on human nature, including behaviour of the citizens in democratic Athens, a theme picked up by Thomas Hobbes who had translated the work and argued the state must be like a “Leviathan”, keeping the people, and the passions, pride and vainglory, in check. Most neorealist see a structural argument in the work; a bipolar prolonged struggle without major decisive battles. Moreover they stress the importance of the longing for independence as a form of freedom for smaller political entities, at that time city-states, comparable to nationalism in our contemporary era.
economic waves since 17807 and Modelski argued that order is marked by a triumphant victor
in a “hegemonic war”8 and lasts roughly a century, in which eventually legitimacy of the
“leader” erodes because a diffusion of power throughout the international system (Rosecrance, 1987:284-5, 287-93). Rosecrance contends that Gilpin’s work is not purely cyclical, and supplements Modelski’s theory of hegemonic demise (Ibid.). In all models for change and transition the role of material power plays a major role but is not always connected to the economy, or political economy. Material theories study relative power as an
aggregate and a “given”9 as is the case in neorealism and Doran’s power cycle (Waltz, 1979;
Mearsheimer, 2014; Doran & Parsons, 1980, Doran, 2005). Metrics and mathematical models are applied to study relative power in relation to changes in the system (who is the most powerful) and the probability of war. In such theories then, change is marked by the change in relative power but not the character of the system or the mechanism trough which this occurs.10 The theories of Gilpin and Organski incorporate a mechanism for change by adding
a social structure centered around politico-legal and economic structures. This seems to be heavily influenced by Hegel, Marx (himself heavily influenced by Hegel), Marxist thinkers like Lenin and Trotsky11, but also E. H. Carr12. The most powerful actors advance social
structures that suit their interests, this structure tends to be quite static but the relative powers of the actors that created it, is more dynamic and subject to change, this creates tensions that may be resolved in revolution (Marx) or war (the international variant). Hegemons actively create social structures when their at the height of their power, if the system is in transition the social structures changes with it (gradually, or revolutionarily). In solely material theories this is not elaborated upon; overarching social structures are not present in an anarchic realm; there is no hierarchy. The balance of power among nations may change but as a phenomenon
they are recurrent because structure denotes anarchy, and not an exertion of the most
powerful states that create order actively and purposefully.
7 And the historian Toynbee argued that throughout modern history a major war occurred about once every fifty years (Rosecrance, 1987:284)
8 A hegemonic war is a war for world leadership (or sub-system) that determines which state can has the power and legitimacy to construct an order it favours.
9 Without a notion of how this power comes about or is redistributed
10 Why a change is relative power and what is the consequence for the character of international order is not
elaborated upon.
11 Lenin’s and Trotsky’s influence manifest themselves in the theories for respectively imperialism and the law of combined development applied by Gilpin (1981:76-70, 93-4, 178-80) and for Organski in relation to Marxists; Houweling and Siccama (1988-87-89) which is very much in concordance with Gilpin’s views.
12 Carr borrowed heavily on Marx’s insights into the failure of capitalism in the inter-war period. Carr confessed that his work the Twenty years crisis was strongly impregnate with Marxist way of thinking applied to international affairs (Carr, 2001:xc)
Table 1. 1. Neorealism, Hegemony Theory and Economic Liberalism
Neorealism
Hegemony theory; Gilpin & neoclassical
Realism Economic Liberalism
The "state" can always be considered a "unit" differentiated in their characteristics differentiated in their characteristics Primary
goal sought Security maximizer
Long-term power maximizer
Long term Economic growth
Order arises spontaneously hierarchically created arises spontaneously
Governance
not possible; instead, self-regulating balance of power
Governance trough Power, Prestige, Property rights
Property rights, institutions, self-regulating market
Notion of Change;
How Change in the balance of power
Disjuncture between the governance of the system and the underlying distribution of power
Gradualism; Long term economic growth, progressive
Why Not studied, inessential
Cumulative secular rates of economic growth Adoption of free market/autarkic backlash Into what Only in terms of Polarity; the number of consequential powers
Political entities change; city-state, empire, nation-state, liberal hegemon and order with it
general historical tendency towards global economic
integration/openness Note; These three theories or paradigms, where chosen to contrast the material and parsimonious base structure of neorealism—which does not have a lot to say about change—with economic liberalism, because it is supportive of change and able to explain economic phenomena; a realm that is very important in the modern era, for it is the main determinant of a state’s power. It is really the Marxist critique that provides for the lubricant to come to a synthesis of the two opposing paradigms resulting in Gilpin’s notion of hegemony. Marxism provides for an explanation of the redistribution of power, missing in neorealism, and the Marxist critique of economic liberalism explain the power and political dimensions of economic liberalism. This synthesis is heavily influenced by the Realist and Marxist critique that E. H. Carr launched at the British Empire.
The “quest” for energy; the “U.S. energy revival” and Chinese “going out” policy
Different manifestations in the “quest” for energy; market-driven innovation and state-driven expansion of Chinese National Oil Companies (NOCs)
Political dimensions of energy is the main topic under study and this thesis incorporates two contemporary trends within the domain of energy that can be tied to political economy and are part of the modern day “quest” as Yergin calls it for “energy, security and
the remaking of the modern world” (2012).13 The first is the so-called U.S. energy revival (the
main topic under study) which has been driven by technological innovation within the U.S. free market environment. The second is China’s quest for energy that is state-driven and manifests itself among other things in the so-called trans-nationalization of Chinese National Oil Companies (NOCs), the structural pressures in which the U.S. energy revival takes place and will be interpreted. These two developments do not have to be directly causally related to each other, nor are they a juxtaposition. The goal of this thesis, however, is to link these contemporary developments and place them in the context of a challenged U.S. by the upcoming or rising China, hence, an understanding of both phenomena is necessary.
Dunn and McClelland write about shale gas and “tight” oil that are now recoverable trough technological innovation of horizontal drilling and hydraulic fracturing (fracking) in the context of America’s oft foretold relative decline, and argue it will have a significant impact on “predictions for geopolitical change” (2013:12-4, 28). Verleger argues that U.S. energy independence will be achieved, a goal advanced by Nixon but that the current path is actually based on much lower costs, and also much cleaner than Nixon envisioned or planned (2012:9-10). Moreover, Verleger argues, it is a market-driven phenomenon where technological innovation, rather than U.S. central planning laid the groundworks for current developments (Ibid,:11, 54). Melikoglu says shale gas development is now a mature industry in the United States and shows that there is a lot of shale potential around the world but that a success like in the U.S. is not guaranteed because of “multiple economic, physical, political and technical uncertainties” and shales in other countries may not be as “fertile” as in the U.S. (2014).
The Chinese quest for energy seems to manifest itself in a different way than the U.S. experience. Amineh & Yang have studied the expansionary policies of Chinese NOCs and find that “package deals dominate Chinese access strategy”, where trade and investments in energy are combined with political and financial support that stimulates “wider strategic economic cooperation” (2014:496). However, they also note the importance of the demand-side, namely China’s economic growth that make expansion into the global market necessary as do Alon, Leung & Simpson (Ibid:509; 2015). Zhang contends that most oil produced by the Chinese NOCs abroad is sold in the international markets, rather than supplied directly back to China, that benefits not only the Chinese consumers but also other global consumers
13 The quote the title of Yergin sequel to his seminal work “the Prize, the epic quest for Oil, Money and Power” (1991) which documented the ascendance of oil as the main industrial resource from the moment the British Empire decided to power their military equipment with till the energy crisis of the 70s and the first Gulf war.
(2012:700). Therefore, he argues that both China and the Western countries need to de-politicize China’s global quest for energy security (Zhang, 2012:701). It seems that on the one hand Chinese energy policy is just a logical extension of its economic needs, but that on the other there is a distrust or ambiguity as to what the wider implications of this state-centric policy in the long run are.
To conclude, the quest for energy tends to differ for the fully industrialized U.S. and the still developing and industrializing China. The U.S.’s path seems to be marked by a domestic focus where fundamentally market driven technological innovation has unlocked domestic resources whereas the late-industrializer China’s policy is more outward oriented that can be justified by its economic growth, but is also mistrusted because of its geopolitical dimension and perceived tight political control.
Sub-theory; Neoclassical realism
As Wohlforth notes (2011:502), Gilpin’s formulation of international politics lends itself excellent for selecting and incorporating middle-range theory. For this Neoclassical Realism will be used. This thesis seeks to study U.S. state policy, or hegemonic governance, in the domain of energy. While the state is at the center of analysis within the realist tradition there is not a well-developed “comprehensive theoretical appreciation of its nature or logic” as Mastanduno, Lake, & Ikenberry observe (1989:471). Neoclassical realism seeks to fill this gap. According to Kitchen the term ‘neoclassical realism’, was first coined by Gideon Rose (1998), which argued that neoclassical realism; “explicitly incorporates both external and internal variables, updating and systematizing certain insights drawn from classical realist thought. Its adherents argue that the scope and ambition of a country’s foreign policy is driven first and foremost by its place in the international system and specifically by its relative material power capabilities [the neorealist notion of structure derived from the system-wide distribution of capabilities]. […] The impact of such power capabilities on foreign policy is
indirect and complex, because systemic pressures must be translated through intervening
variables at the unit level (Rose, 1998:51; Kitchen, 2010:117, emphasis added). Neoclassical realist thus agree with the notion that systemic pressures constrain and shape states’ behavior, however, making sense of, or interpreting these pressures is murky and are inevitably transmitted through domestic structures and channels. One can see already that this is more closely to Gilpin’s conception of states operating in a more complex system, taking into account more dimensions of both the external environment as internal/domestic structures. Within this line of thought a number of authors have written about political economy. David
Lake for instance has written about “hegemony theory”, he argues that states are “possess different trade policy preferences derived from their various positions within the international economic structure” (1993:469). Preferences may differ because of a states’ position within a certain hierarchy. MacDonald surmises Lake’s definition of hierarchy as a situation "when one unit, the dominant state, possesses authority over a second, subordinate state". Political authority, in turn, is conceived of as a "contract" in which a dominant actor provides "social order" in exchange for a subordinate' (MacDonald & Lake, 2008:171; Lake, 2007). Krasner has analyzed economic structures of trade and relative openness of the world-economy in the context of this hierarchy (1976; Webb & Krasner, 1989). Mastanduno has also written about power and security in relation to trade and the structure of the economic base putting an emphasis on what states actually do and how they profit from structuring the world-economy (Mastanduno, 1989: Mastanduno, 2009). Furthermore the work of Gowa and Mansfield provides theory and methods for studying trade in relation to security and power and argue that states prefer to trade with allies and that there are always geopolitical considerations at play (1993; 2004; Mansfield & Bronson, 1997). To conclude, the literature found in neoclassical realism incorporates much more international economy that takes into account power relations, moreover it is not only concerned with outcomes but also focused on actual state behavior, preferences and foreign policy. Therefor it lends itself excellently for using it in this thesis.
1.6. Research Design and Methodology
The research design in this thesis is of great importance. It must be noted however that the method of inquiry was such that considerable efforts were put into theory construction before selecting relevant cases and formulating hypothesis. The theoretical section that guides this research is provided for in chapter 3. The research design provided for in this section will structure the research part provided for in chapter 4 and 5.
Argumentation & Hypothesis
In this thesis it is argued that governance over the global energy structures manifests itself in two ways. One is indirectly, wherefrom the focus on impact derives from (studied in Chap 4), and the other is through direct policy wherefrom the notion of actively exercising governance comes from (studied in Chap 5) and is with a forward looking basis. This subdivision provides for the following frame and hypotheses.
Chapter 4. Study on impact (indirect results of U.S. increased energy production)
The U.S. energy revival is for the most part an endogenous phenomenon that came about because of a confluence of circumstances. The main point is, that it is most certainly not the result of a “grand national scheme” that was designed to gain governance over the world energy market. Indeed, one could see it more as an economic phenomenon instead of a political economic phenomenon. However, increased production makes the U.S. more energy secure and also has had a significant effect on world energy prices, that have went down. This is the impact, that has not been totally goal driven, and because of this the political meaning is not clear. Therefor the impact has be connected to global politics, this is tested with the following propositions and hypothesis;
U.S. increased energy production in relation to the global energy market
Gilpin calls the break-away of oil-producing and -exporting countries (OPEC) a form of successful peaceful change (1981:208). While this may be the case, it is also a form of sub-optimization, where a group or coalition breaks away from economic structuring of the hegemon’s advanced order to seek higher returns for itself. The coercive power of OPEC since than has been a major concern, and the drive for energy independence arguably was intensified because of it. In this part the research will turn to whether the U.S. energy revival has brought shifted power away from OPEC in the U.S. favor, hence;
Hypothesis 1;
- U.S. increased energy production increases leverage over OPEC and enables governance over the energy market
leverage over OPEC is defined as “influence over the behavior of other major producers”. and governance over the energy market as “influence over global energy prices”
U.S. energy in relation to the U.S. Dollar
The U.S. as a national actor, because of its political culture, does not have control over how much energy it produces. Energy companies are not state controlled and the government does not control production levels. It does have control over the currency in which oil is priced and which is widely held internationally, namely the U.S. Dollar. According to the EIA the Dollar and the financial markets serve as an intervening variable for price determination of oil. Since prices are a major component of governance over the economy the relation between the Dollar and the U.S. energy revival will be studied.
Hypothesis 2;
- The U.S. energy revival is enhances the structural power of the U.S. Dollar.
Structural power of the Dollar is defined as “increased willingness of third parties to hold Dollars” and “increased room and maneuverability in deferring costs to Dollar and Dollar denominated bond holders” and “increased room and maneuverability in manipulating the value of the Dollar to achieve politico-economic ends”.
Chapter 5. Study on actively exercising governance
With the U.S.’s new energy position its capabilities in the energy realm have changed because it has more resources at its disposal. It is more energy secure which could change its global stance towards different regions. Thus interest and capabilities have changed, that potentially could be actively put to work. The question is to what extend this is actually possible. This will be studied within the framework of challenged hegemony by China that has a comprehensive strategy of securing energy for itself in the so-called “going out” policy that potentially poses a threat to U.S.’ advanced order. Hence the next step is to study whether U.S. new energy capabilities can be actively put to work within the framework presented in
chapter 3. This is tested by the following propositions and hypothesis that each represent a
case.
Case 1. Naval power in relation to China’s energy-supply-security
Chinese efforts to secure oil supplies around the world forms a systemic threat because the anchor points established around the world, due to China’s going out policy, creates a new hierarchy with China at the core. The fear is that Chinese nationalist efforts to secure oil, also dubbed “neo-mercantilist” may lead to self-sufficiency for unimpeded supply, circumventing the market mechanism advanced by America. However, there is another intervening mechanism by which self-sufficiency for unimpeded supply through nationalistic efforts is guarded against, and this is control over sea lines of communications (SLOCs) trough naval power. The importance of naval power, then, needs to be investigated in order to test whether it is important for Chinese energy-supply-security, hence;
Hypothesis Case 1;
- China does not have to become a regional hegemon to secure energy supplies.
Regional hegemony is a concept brought forward by the neorealist Mearsheimer and will be
used in its original intended meaning. Regional hegemony combines the concepts of relative capabilities to geography. It entails military dominance of a state in its respective region to such a degree that no other state is able to challenge it. Because of this, a regional hegemon is “free to roam” and can be more outward oriented in its global posture, since it is not constrained by a nearby competitor threatening its direct security (Mearsheimer, 2014:40-2).
Case 2. U.S. energy capabilities in relation to Chinese shale development
The U.S. has successfully overcome barriers in the development in shale gas and tight oil. Therefor it may be considered a frontrunner with considerable know-how. China ranks number one in technically recoverable shale gas reserves, but does not produce much at this moment. The threat identified with China’s going out policy could be moderated if China develops more energy for itself, thereby turning its focus more inward. Cooperation could have a strategic dimension and stymie international competition. This will be investigated in this case, hence;
Hypothesis Case 2;
- The energy capabilities of the U.S. can be used for strategic cooperation with China that will ameliorate China’s going out policy.
Case 3. U.S. LNG export capacity in relation to the East- & Southeast Asia LNG market America has as a result of its increased energy production obtained significant export capacity of Liquified Natural Gas (LNG). U.S. export capacity could potentially be put to use towards East- & Southeast Asia with a strategic orientation. This will be investigated in this case, hence;
Hypothesis Case 3;
- Engaging in LNG relations by either directly supplying or creating LNG markets in East- & Southeast Asia can have a significant effect in ameliorating China’s going out policy, and/or increase a legitimate footprint in the region.
Method, Data Collection and Data Analysis
Data was collected mainly from the Energy Information Administration (EIA). Since the EIA is a U.S. government institution it is actively involved in providing data with an emphasis on U.S. energy. The EIA interactive database provides for reliable current and future production estimates. Future estimates are however always uncertain. To get a better indication of possible future developments, most data provided for (as for instance production levels and estimates) will be placed within current market trends, pertaining to the prices of oil and gas. If prices are lower, and production levels do not decline significantly, this provides for an indication of the competitiveness of U.S. energy and the marginal costs of production. If prices would be higher, the U.S. could potentially produce more. Market and economic data will be collected from Tradingeconomics.com which uses official data that can be put in graph. To analyze the political meaning of for instance OPEC or Saudi production levels historical behavior and trends can be analyzed. Economic theory, as for instance cartel or oligopolist theory can be added to the analysis.
Conceptualization and definitions
Hegemony
Hegemons arise often to a confluence of circumstances in historical time periods that generate expansionist forces. Time periods are marked by conflict among major powers that result in peace-settlements that in turn serve as ordering moments. After a war among major powers results in a victory for one nation, the components of the system are reshuffled; the distribution of power has changed and territory is redistributed. The victor, at the height of its power and prestige, faces an opened-up international order and is incentivized to expand and structure it a way it deems favorable to its interests. A hegemon therefore is marked by extension. Extension occurs trough economic means; trade and investment,— military means; providing for control of global commons and protection for economic interests—and,
politico-legal means; setting rules for international conduct, legal administration of territory
and determining property rights. These tenets of extension form an integrated whole and are of such force and reach that it structures world order, which is a social structure reflecting the interest of its creator. It is not the same as the balance of power, which is more dynamic. The components and structure of world order do not change in unison with a redistribution of power. This, according to Gilpin is one of the main problems with power transitions, for it increases the chance of war enacted by a rising power that seeks to have a larger share or “stake” in the international system.
Energy capabilities
The term energy capabilities is not theoretical or a concept. It is used out of convenience as an umbrella term to denote the capabilities the U.S. has in the realm of energy, mainly referring to the technology for extracting shale gas and oil—horizontal drilling and hydraulic fracturing—and, the capacity and capabilities to export LNG.
The structure of this thesis
This thesis will be structured in the following fashion;
- In chapter 2. An overview of the energy profile of both the U.S. and China will be provided for in the context of their respective history.
- In chapter 3. Gilpin’s model for global order and change will be explained in detail. This will provide for a deeper understanding of the main premises guiding this thesis. The political economy of energy will placed in the context of changes occurring in the international system.
- In chapter 4 the impact of the energy revival on U.S. wealth and power and impact on control over its order will be studied.
- Chapter 5 consists of three cases; a study on the importance of maritime power in securing energy security (Case1). Then the strategic meaning of cooperating with China in its shale development will be studied (Case 2). Lastly the geo-economic use of LNG export or market creation in East- & Southeast Asia will be investigated (Case
3)
Chapter 2. Country Energy Overview and Profile
This chapter seeks to provide an overview of the current energy picture and profile of both the U.S. and China. For each nation their profile will be placed within an historical context to get a better hold on the development of state structures and energy policy in the context of energy consumption and production (relative scarcity). The question that will be answered is what are contemporary trends in each country’s energy profile and consequent policy reactions? The chapter will start with a short history of U.S. energy and the role it has played in its domestic development and foreign policy. The section will end with a short overview of the current situation in terms of production but will not go in depth as to how the “revival” came about which will be the start of research chapter 4. Thereafter the energy profile of China and will be discussed. Here, the taken time frame will be shorter since China as an actor serves only as an independent variable for explaining U.S. behavior and policy. China’s energy profile since the 90s, when oil consumption started to outgrow domestic production, and the consequent policy response will be discussed. The political meaning in terms of how this forms a challenge for the U.S. and how Chinese policy gradually changes the system will be discussed in chapter 3. Thus, the focus will solely be on China’s energy profile and policy responses, starting in the 1990s.
2.1. U.S. Oil History
Oil and the rise of the modern Multinational company
Oil has been an American story from the beginning (Yergin, 1991:3-19). As with the gold rush it brought about frantic booms and busts.14 When John D. Rockefeller founded what in
1870 would become Standard Oil, the modern oil industry was born according to Yergin (Ibid:19). The practices of Standard Oil restored order in the frantic market, albeit trough merciless late-19th century capitalism. Rockefeller saw the development in the young industry
as the “Great Game” and was the first to integrate the process of bringing supply and distribution functions inside one organization (Ibid:21). Through the creation of economies of scale, Standard Oil to set prices below what competitors were able to do, these funds where then used to buy out competitors strengthening its monopoly position. By 1879, Yergin records, Standard oil controlled 90% of the U.S.’s refining capacity, while also controlling or
14 As Yergin records; between 1860 and 1862 production of oil in Pennsylvania alone rose from 450,000 barrel to 3mln. In January 1861 the price of a barrel was $10,- but only 10 $cents in June of that year.
dominating accompanying infrastructure in the major oil regions (Ibid.:23-27). To conclude, the rise of oil was in many ways the industrial rise of America and the ascendance of the modern day integrated oil multinational. Up till the end of the second world war America produced over half of the world’s oil output, as seen in Figure 2.1.
Figure 2.1. U.S. Percentage of World Oil Production
Note; America has historically been a major oil producer. Up to the Second World War it produced over half the world’s oil.
Source; Gramling & Freudenburg, (2012:55)
Energy & U.S. Property rights, capitalism and U.S. culture of independence
Owners of private property in the U.S. automatically are in ownership of subsurface mineral rights (Cooke, 2014:2). The U.S. is arguably the most liberal in granting such rights driven by the believe that it is the most beneficial to economic growth and freedom (Friedman, 2002). Gilpin argues that the economic success of Western nations and its middle class “entails the establishment of institutional arrangements and property rights that create an incentive to channel [...] and bring the private rate of return close to the social rate of return (1981:101-2). Based on this principle, private parties in the U.S. have a very strong position embedded in law. Corporations can buy property and will thereby own all resources underground; private parties, including stockholders own the corporations, the state functions as the “night-watchman” having the power to check if rights are adhered to and no externalities are created
by the parties involved in the economic activity. Parties can also extract resources from property from another party in exchange for royalties. Because of these domestic arrangements the extraction of oil and gas in the U.S. is mostly dependent on private initiative. The U.S. does not have national oil companies and although there are “oil majors” that are among the largest companies in the world there are also a lot of smaller producers that enjoy full rights to extract energy and are fully rewarded the fruits of their labor and investment. Property rights, in the American context, may therefore be considered a part of the culture of independence and freedom that is closely associated with capitalism.15 Because
private initiative is the main driver of energy production the government has less or maybe even no control over how much is actually produced. With increased production therefor, one must keep in mind that the government cannot, like in for instance Saudi Arabia or Russia cut production to desired levels for this would take away rights from citizens and be an affront to American political culture.
Figure 2.2. U.S. historical field production of oil
Note; Oil production of the U.S. peaked in the 70s initiating a new era Source; EIA, U.S. Field Production. (2017, May 31)
15 The association between freedom and capitalism was particularly emphasized in the Cold War by president Reagan and his counterpart Margaret Thatcher who based their philosophy on Milton Friedman and Friedrich von Hayek who wrote “Capitalism and freedom” and the “road to serfdom”. While this association may change over time depending on world events and contemporary ideologies it is deeply embedded in American political culture stemming from the founding of the United States. For instance, the sentence found in the declaration of independence reads that among alienable rights there is “the right to life, liberty and the pursuit of happiness” stemming from John Locke who formulated it differently namely as the “right to life, liberty and property” (emphasis added). If the right to property where to be taken away from the people, Locke argues, it would be an act of war against the people and they would have a natural right to revolt and dispose of the government
2.2. The era after abundance; U.S. oil from the 70s till ‘07;
Scarcity, geopolitical shifts & oil related conflict
Since oil is such an important resource in a nations overall capabilities, it is imperative that it’s production and reserves are not controlled by a single power, for the U.S. could then become the subject of blackmail. Therefore, in the global grand strategy pertaining to the division of core regions based on territory, there is always an overlay of resource division within this space, and access to these resources in geographical choke-points like the Suez canal, the strait of Hormuz and the strait of Malacca. This played a major role in U.S. policy in the Cold war and also the first Gulf war. Other examples are the important and complicated alliance that the U.S. has with Saudi Arabia (Lake, 2013:118; Painter, 2014:201; Rovner & Talmadge, 2014).
U.S. oil production peaked in the beginning of the 70s. The peak of U.S. oil production precipitates the oil crises of the following decade. Through the creation and embargo of OPEC the oil market became more turbulent and prices spiked; it meant the end of an era for America, it was no longer isolated from the geopolitics of oil. Arguably from this point on, the decline in U.S. oil production has led to a more outward oriented geopolitical stance on energy security. The Iranian revolution led to the disappearance of the Shah as a reliable energy-ally and refocused U.S. attention to Saudi Arabia and other Gulf countries most notably Iraq. Thus the decline in U.S. production gave rise to the importance of energy geopolitics by securing partners that would keep up production.
In conclusion we can say that the U.S. has traditionally been a very important and large producer of oil and gas. It was instrumental in the very beginnings of oil. Resource nationalism has never been a strong political position in the U.S. The national plan for achieving energy independence has not worked, and instead a combination of the defensive market response with more geopolitical assertiveness has been the U.S.’ answer to decreased production. The implication for this research is that the question as to whether the US has a comprehensive energy-strategy is more open since it never really had a very state-centered policy, instead its energy journey seems to have been steered by events rather than major national strategic decisions. Thus recent development do not stand out in America’s long history (1860-1945/70) but they do stand out in the contemporary history from the 70s on. The US is now less reliant on foreign nations to deliver oil, a reversal of trend that widen the U.S.’s foreign policy options but could also have unintended consequences.
2.3. US energy since 2007; the impact of the revival
The U.S. energy revival has made the U.S. the largest producer of oil & gas combined. The extraction of gas has been the biggest success, it is now independent in natural gas and able to export LNG. While oil production has increased considerable it is unlikely production levels will increase to net-export capacity. In most cases U.S. future production is dependent on the price-environment. This dynamic will be further studied in Chapter 4, because prices are also dependent on other producers’ production. For the major producers this might be politically determined and thus it is part of the analysis and not of the current overview.
Figure 2.3. Petroleum Production and Consumption; the Developing Balance (1949-2015)
Note; Production is catching up with consumption. Whether energy independence will ever be reached depends on the conditions among which the prices of oil. When prices are higher more producers will come in, but not when low. However if prices are low this indicates there is enough supply in the world and the relative value of independence goes down.
Figure 2.4. Increased LNG productions means exports are in sight
Notes; The most recent projections are that the U.S. will be self-sufficient in gas and will by 2020 have about the export capacity of LNG-exports as Qatar and Australia (who combined from the top 3).
Source; EIA, Liquefied natural gas exports (2017, February 22)
2.4. China; from autarkic independence to “going out”
China was energy self-sufficient before 1992. Its growth spurt that continues to this day has led to vastly higher consumption of energy than production especially pertaining to oil. In the 90s when Chinese oil consumption started to outgrow domestic consumption the Chinese embarked on a neo-mercantilist adjustment. Li and Leung note that China wanted to maintain self-sufficient in production of oil. To achieve this the government issued oil import bans in 1994 and 1998 to promote domestic production (2011:61). Economic growth and the need for oil, continued to grow in a more rapid pace than domestic production could bear. Their strategy became thereby more outward oriented through their NOCs. This outward focus manifest itself in two ways; general internationalization and trans-nationalization.
Internationalization
Internationalization simply refers to overseas investment by Chinese NOCs just as most IOCs do. The first of such investments was in Canada in 1992, in the oil sands industry. Li and Leung argue that since none of this oil was transported back to China this FDI probably indicated that it was “based on profit expectations, commercial gain, and likely for the acquisition of technological knowledge” (2011:61)
Trans-nationalization
Trans-nationalization entails the closing of bilateral oil deals. This bilateralism is marked by “package deals” where trade and investments in energy are combined with political and financial support that stimulates “wider strategic economic cooperation” (Amineh & Yang, 2014:496).
Figure 2.5. Chinese Oil Production and Consumption; the Balance
Notes; Consumption is rapidly outgrowing production, the going out strategy is for China a structural necessity Source; EIA, China International Analysis (2016, November 04)
To conclude, the U.S.’s energy picture has vastly improved. While this has come as a surprise, from a historical perspective the U.S. has always been a significant producer of oil and gas. Oil is also a part of U.S. culture and spirit of capitalism. For China, the picture looks more like the opposite but this means it has to go out to secure energy. Over time these pressures will only increase. In chapter 3 it will be discussed why this poses a threat to the current international system.
Chapter 3. Theory of Hegemony & Change; The U.S. & China
Introduction
In this part the intention is to describe the change occurring in the international system by combining both theory and empirical examples. The question this part seeks to answer is; how can we conceive of U.S. global order in a systemic way, and what are the challenges that the it faces with the rise of China? To answer this question the framework for understanding international change—that is centered around the rise and decline of hegemonic powers— from Gilpin’s work War & Change in World Politics will be used (1981). While war and power-politics are like in neorealism of major importance in this work, Gilpin’s conception of change is mainly explained in terms of changes occurring in international political economy, which will be focus of this thesis. Gilpin draws upon multiple concepts derived from sociology and economics16 that are often associated with separate grand theories, or
“paradigms”, like Marxism, liberalism and realism but are used in combination, or, in eclectic fashion by Gilpin. Only the most important concepts that are applicable to this study will be discussed.
This chapter will proceed in the following fashion. First Gilpin’s grand theoretical framework will be discussed. The analysis starts by laying out the components of the international system and how they stand in relation to each other. Then a short discussion will follow on how international orders are established and what the fundamental problem with change is, namely the stress associated with power transitions. After that the focus turn to political economy. The role of the differential rates of growth will be discussed and the mechanism by which a system can change trough recurrent cycles in the modern international economy. This last section delineates the relevant concepts applied to the case of the US energy revival and its meaning in the context the U.S. being a contended hegemon facing a potential peer competitor with an alternate economic model. This formulates the full framework that analyses multiple facets of the energy revival on US absolute power and the potential for active power.
Gilpin’s book War and Change in World Politics was published in 1981 and has thus become of considerable age, begging the question whether it is still relevant. Its relevance derives from the ability to explain three international political events after it was written while other theories, most notably neorealism failed to do so. The first is the end of the Cold War
16 Sociology for the value of explaining behaviour of social actors by analysing social system or structure and economic theory which Gilpin equates with rational choice theory (1981:ix-x)
brought about by the economic decline of the Soviet Union. Gilpin did not foresee this, but his theory puts great emphasis on economic health of great powers or empires in order to be able to control their external environment. Russia as the core was not able to do this and overextended itself by invading Afghanistan thereby draining its resources even more.17
These are all themes discussed in Gilpin’s work providing explanations for why and how change occurs.18 The second event is U.S. deliberate efforts to expand politically, territorially and economically after the Cold War and create an order reflecting U.S. political preferences
congenial to its interests.19 Neorealist did not predict this since there was no necessity
deriving from structure, and, are to this day often baffled by U.S.’ commitment to actively advance an order they deem preferable to a balance of power system. Gilpin’s argument is that states are predisposed to expand if the benefits outweigh the costs and strive for hegemony if possible, leaving their distinctive imprint on world order; a frame better suited for explaining post-Cold War activism. Third and, lastly, that Gilpin’s model provides for a notion of change due to differential rates of economic growth is not the only fit, he also argues that this happens in a nationalistic way in response to a liberal hegemon that has broken open the system. China has an export-led growth model that is also state-led, tapping in to the global consumer market profiting from the world’s openness. This could hardly be foreseen in ’81 yet it provides for a very apt description of current events.
3.1. Gilpin’s Grand Theoretical Framework
According to Gilpin the international system is “an aggregation of diverse entities united by regular interaction according to a form of control” (1981:26). This definition is already more broad then that of Waltz, who argued that the international system is composed of alike units, i.e. states, without any form of governance, accept order that spontaneously arises through coaction of states, in the form of recurrent formations of balances-of-power in an anarchic realm (1979). Gilpin’s formulation contains more different entities that can stand in hierarchical relation to one another, and whereby actors exercise control over order. From this
17 This pattern is also recognizable in U.S. behavior leading to high budget deficits and debt to GDP ratio. The U.S. is however a more vibrant economy than the Soviet Union ever was.
18 Technically Waltz argued that a bipolar system was not stable but also not prone to war (1993:45, nuclear weapons playing a major role in keeping the system peaceful, Ibid:45). It was not stable since it was likely to change over time into another system (multi-, or less likely , uni- polarity). One would assume that, in the absence of war, economic explanations for bringing about this change in the system would be of major importance. Yet, this is hardly discussed, whereas Gilpin places differential rates of economic growth at the center of his theory as the driving force for change (Gilpin, 1981:67)
19 The U.S. reads; “Our basic values—and our basic geopolitical necessities—remain. As the world's most powerful democracy, we are inescapably the leader, the connecting link in a global alliance of democracies.” (U.S. NSS, 1990:2)
systemic definition one can already derive that Gilpin’s framework is less about states20—
who he does consider the primary actor in the international system (1981:17, 26)—and more about the nature of such states as “divers entities” like empires, city-states and nation-states, and its influence on international order. The character of these states determine rules for diplomacy, alliances, and rules concerning interactions among states in the modern world-economy that apply to trade, money relations and foreign investment (Ibid:26-7).
Gilpin states that the main argument of his theory is that “an international system is established for the same reason that any social or political system is created; actors enter social relations and create social structures in order to advance particular sets of political,
economic, or other types of interest. Because the interest[s] of some of the actors may conflict
[…], the particular interest that are most favored by these arrangements tend to reflect the
relative powers of the actors involved” (emphasis added, Ibid:9). Here, again, we see the role
of agency of the major powers in creating order. Order might be a compromise among great powers21, but in certain circumstances a major power may be relatively unconstrained in
creating an international system. It is in these moments in which real hegemons arise leaving their mark on international order. This order will tend to reflect the character and interest of the state that created it, by crafting rules that privilege their domestic ruling coalitions over those in other countries (Ikenberry, 2014:62 [Lake]).
Gilpin final formulation of his system is somewhat ambiguous which might be the result of combining his classical realist instincts and preference for eclecticism with more “structural systems theory”22. In light of Waltz’s work, arguably it it’s not really a system’s
theory, and Gilpin’s description as “framework for understanding” based on recognizable recurrent pattern in history is a better suited formulation of his grand frame (Ibid:3, 10-11). Gilpin’s model consist of three components making up the system, which together also form the “mechanisms of control”23 (1981:28). These are; the distribution of power, the hierarchy of prestige and, finally, a set of rights and rules.
The distribution of power is the principle form of control and may be roughly equated with the neorealist notion of “the system-wide distribution of capabilities”. It being the
20 Especially less about the number of great powers, as is the case in neorealism, where structure is derived from the number of great powers in terms of polarity
21 As a balance of power where all parties are content with the status quo as was the case in the “Concert of Europe”
22 This structuralism was as Kirshner notes “shaped by concern of the time”, i.e. the Cold War (Ikenberry, 2014:131 [Kirshner])
23 Gilpin admits that his notion of governance or control over the system is quite controversial in light of the prevalent notion that in international relation it is exactly the absence of control that determines political outcomes (1981:26)
