Who is bearing the weight of US energy domination?

The current willingness of Washington to ride rough-shod over its allies’ interests is not a novelty but an acceleration of past trends

A drilling rig near Midland, Texas. In the past decade, exploitation of shale resources has made the US the biggest gross oil and gas exporter in the world. Reuters

“It may be dangerous to be America's enemy, but to be America's friend is fatal,” former secretary of state Henry Kissinger said in 1968. This applies particularly to energy. Washington’s current willingness to ride roughshod over its allies’ interests is not a novelty but an acceleration of past trends.

The US is not a conventional petrostate, but last year, 16 per cent of its exports were carbon fuels, another 6.4 per cent were plastics and organic chemicals, usually made from hydrocarbons. Its top three exports by value were refined petroleum, crude oil and natural gas.

Even when the US was a net energy importer, it was always a big producer, where petroleum interests from states such as Texas were influential. Over the past decade, exploitation of shale resources has made the country the biggest gross oil and gas exporter in the world. That led President Donald Trump to proclaim not just “energy independence”, but in 2017, “energy dominance”, a phrase repeated by his new energy secretary, Chris Wright, last week.

Three groups of the US’s friends feel the overbearing weight of this domination. First are the energy-importing states in Europe and Asia, including Japan, South Korea, Taiwan and India. Most of them are members of the International Energy Agency, set up by Kissinger in 1974 to co-ordinate the industrialised world’s response to that era’s oil shocks. Now, statements by think tanks and advisers close to Mr Trump suggest there will be moves to pressure the IEA, change its leadership or withdraw.

America’s friends don’t need to become America’s enemies, but they do not need to accept domination either

The divergence in energy interests between the US on the one hand, and its European and East Asian allies on the other, was papered over for a decade. Views on climate had already caused problems when president and former Texas governor George W Bush left the Kyoto Protocol in 2001, the Senate already having refused to ratify the treaty after Bill Clinton signed it in 1998.

Mr Trump withdrew from the Paris Agreement in 2017 and again this year. This time around, his administration looks not just passive on climate action, but hostile to it.

Compliance with Washington’s geopolitical wishes has become increasingly difficult for Europe, Japan and India as economic interests have diverged.

The US’s newfound “energy independence” with shale clearly freed president Barack Obama to impose stricter sanctions on Iran than he would have dared politically otherwise. Over-reliance on oil and gas exports was the Achilles heel of the Iranian regime and likewise Venezuela. But it meant less choice of suppliers and higher prices for Europe and East Asia. China, by contrast, benefited from being able to ignore or sidestep most sanctions.

The more states that are sanctioned, the greater the conflict between objectives. The US has opposed Iranian gas supplies to energy-short and politically troubled countries, notably Iraq and Pakistan. In the 2000s, it also opposed a gas pipeline to take gas from Iran and the Caspian region to south-eastern Europe, which would have helped diversify away from Russian gas. More quietly, Washington does not seem to have supported a pipeline to take East Mediterranean gas to Europe.

Trump enforces maximum pressure on Iran

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US sanctions have also heavily restricted Iran’s oil sector, to the point that its only paying customer is China. Attempts at normalisation with Iran have repeatedly been torpedoed by hardliners, in Tehran, but more in Washington. Now, Tehran sits firmly in the Beijing-Moscow camp, helping to arm Russia against Ukraine.

Mr Trump posted in December, “I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!”. But those imports, as well as undermining European climate policy, would make the continent more vulnerable to being squeezed on other issues.

The second group under pressure are the US’s energy-exporting neighbours, Canada and Mexico. On 1 February, Mr Trump announced heavy tariffs on both countries. Tied in by an intricate network of pipelines, terminals and electricity cables, they form an integrated North American energy bloc which is a key part of the US’s competitive advantage.

Although the tariffs have now been paused for a month, the shock reminds Ottawa and Mexico City of their acute dependence on their neighbour. The countries, especially Canada, are now looking for other access to world markets.

Canada and Mexico hit back after Trump imposes heavy tariffs

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The third concerned group are the big oil and gas exporters of the Middle East. The low cost and vast scale of their production, and the region's geographic distance from the US, has enabled them to get off lightly so far. Still, they have had to cut back oil output repeatedly and tolerate lower prices to cope with competition from shale.

They have somewhat benefited from US measures against some of their competitors. But even here, they are vulnerable to capricious politics. In 2018, Mr Trump demanded higher production from Opec during his campaign against Iranian oil exports, but that November, he gave exemptions to eight countries, causing oil prices to plummet by more than $30 per barrel.

In early 2020, he encouraged Opec+ to take action to increase prices in the face of the demand collapse caused by the Covid pandemic, but last month he exhorted the organisation to cut prices, saying it would bring an end to the Russia-Ukraine war.

The fact is, no one wants to be “dominated” by an energy partner, and the suggestion causes them quickly to look for alternatives. Canada can construct new pipelines to its Pacific and Atlantic coasts. Europe, China and Japan can accelerate their adoption of renewables, nuclear power and electric vehicles to cut oil and gas imports. China can buy more gas from Russia and Central Asia, and develop unconventional resources at home.

In particular, Europe, Japan, India and China can co-operate. They have common interests in accelerating the adoption of low-carbon energies. Crucial here is to benefit from China’s manufacturing excellence while reducing its dominance. The Gulf, as a potential low-carbon provider of energy-intensive materials, could be a vital partner.

It would help Europe to have the ability to work with the US on sanctions when it wishes, as on Russia, but to avoid them at other times.

Perhaps, though, the most crucial realignment is psychological. All the world’s key energy poles, of exports and imports, need to be able to look after their own interests, by collaboration where possible, co-operation where necessary. Opec+, a widening of the traditional organisation, is one example.

Europe should not swap one energy subordination, to the Kremlin, for another, to the White House, whether it houses Mr Bush, Mr Obama, Mr Biden or Mr Trump. America’s friends don’t need to become America’s enemies, but they do not need to accept domination either.

Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis