The withdrawal of US troops from Iraq by the year-end will probably be followed by a much bigger US withdrawal from the Persian Gulf. Policy analysts have long assumed that the US must have a dominant military presence in the Gulf to secure its oil supplies. But new technologies and oil discoveries suggest that by 2020, the US will import all its oil from the western hemisphere, ending its dependence on the Gulf. That will sharply reduce its strategic interest and spending in the region.
Till now, the US navy has ensured secure oil movement from and beyond the Gulf. India has been a free rider, getting oil security at no cost. China’s presence in the region has till now been minimal.
But a US withdrawal, even if partial, will usher in Chinese dominance. India will view that with trepidation.
Foreign policy analysts have long believed that US troops in the region (and two invasions of Iraq) were “all about oil.” That is only partially true. The US is quitting Iraq after eight years without any oil windfalls. Iraq’s oilfields remain government-owned , and foreign companies hired to rehabilitate fields are getting a puny fee of $2 per barrel.
After the rise of OPEC in the 1970s, all Gulf oilfields owned by foreign oil companies (including US ones) were nationalized , converting US giants like Exxon and Chevron from owners to mere traders of oil. But the Gulf still mattered strategically to the US, since it (and Nato) depended substantially on oil imports from the region.
However, that is about to change dramatically . US imports of oil from Saudi Arabia and other Gulf countries have already fallen from a peak of 2.76 million barrels per day (mbd) in 2001 to 1.71 mbd in 2010. Fast-rising US production of shale oil is the big new surprise, helping oil imports to decline from 60% of consumption to an estimated 47% this year. Much of that is being met by rising Canadian oil production from tar sands.
The US has enormous shale oil deposits that were unviable earlier: oil did not flow in such “tight” rock formations . But a new technology, fracking, combined with horizontal drilling, increases the oil flow and makes production profitable. US shale oil production has zoomed from almost nothing to 0.9 mbd in 2010, and should more than triple to 2.9 mbd by 2020. By comparison, US imports from Saudi Arabia are currently just 1.1 mbd.
Meanwhile Canadian oil production from tar sands is rising fast and should cross 3 mbd by 2020. If the US opens up its east and west coasts to drilling, says Ed Crooks of the Financial Times, oil production in US and Canada by 2020 could touch 22 mbd, virtually equal to the oil consumption of the two countries last year!
This sounds too optimistic. But US oil imports will definitely shrink fast. The fracking technology used in shale oil has for a decade been used to produce shale gas, and has converted the US from a gas deficit to surplus nation. The US gas price has crashed to just $3.7/ mmbtu, against $10-15 /mmbtu in Asia. Part of the huge US bus and truck fleets could be converted to run on cheap gas. Besides, the government has mandated mixing of ethanol in petrol and higher mileage standards for new cars. US oil consumption peaked at 20.7 mbd in 2007 and has since declined, and the decline may continue because of the new government mandates.
Old US pipedreams about oil independence may actually approach reality . Ed Morse, a former US energy diplomat now at Citicorp, estimates that US imports will fall from 10 mdb today to just 3 mbd by 2020, and can be met entirely from Canada and Mexico.
Besides, giant “pre-salt” oilfields have been discovered in Brazil, and optimistic projections pitch its production at 6 mbd by 2020. Major discoveries have also been made in the Caribbean, including a giant one off French Guyana.
The Western hemisphere will soon have an oil surplus. Even if US import needs are higher than projected, these will easily be met by its neighbours. The US will still have a geopolitical interest in the Gulf, but its strategic importance as an oil supplier will plummet. The US will probably slash its Gulf presence to trim its chronic budget deficit.
China will fill the gap. It is soon going to be the largest importer of Gulf oil by far. It is building a huge navy that could first supplement and then largely replace the US navy. This will dismay Indian strategists.