Monday, September 24, 2012

Who is Holding the Cards?

The booming U.S. shale oil and gas production is not necessarily a recipe for the country’s energy independence because China will prevent the U.S. from reaching it. So goes the argument of an article by Matthew Hulbert featured in Forbes on August 23, 2012. In Hulbert’s view, China’s relentless acquisition of physical assets and sucking out of the North American energy will basically render the notion of energy independence an illusion.
While Hulbert makes a good point about China’s active role in gaining a foothold on North American energy market both in terms of investment and imports of oil and natural gas, it appears his argument on China stopping the U.S. from reaching energy independence is as uncertain as China’s ability to single-handedly rebalance WTI and Brent crude oil benchmarks. The starting point for energy-hungry China is to increase supplies at home and from abroad and the U.S. is potentially an important supplier. The frenzy to gain access to the North American energy market is driven by China’s goal to obtain technological know-how to develop its own copious reserves of shale gas as well as to secure oil and gas supplies. China’s access to North American physical assets would help China achieve these goals. But China would not be the one calling the shots in the U.S., which is dominated by domestic energy majors as well as foreign investors other than China. 
For better or worse, America acts in its self-interest in terms of its energy supply security. It is a country that instituted a law banning crude oil exports under the Mineral Leasing Act of 1920 and Outer Continental Shelf Leasing Act. The ban has eased somewhat in recent years due to booming domestic shale oil supplies. But as recently as March 2012, Congressional Democrats sought a bill that would ban any export of American oil to keep energy costs down. It make sense to sell them abroad because most local refineries are better fit for processing heavier crudes. It is possible that U.S. may export its excess cheap natural gas to China, but it will be sensitive to changes in domestic market fundamentals and prices, which will determine the level of exports. At the moment, U.S. would benefit from clearing the natural gas glut, but it is uncertain that low domestic natural gas prices and exports will be a long-term development. A change in domestic gas demand and price will affect how much of it will continue to be exported.
One thing that Hulbert is on point is America’s inability to insulate itself from fluctuations of international oil prices because of their interdependence. U.S. cannot control that, so full energy independence as such may never be achieved.