Friday, 1 March 2013

Reader reply: Australian energy, fracking and geopolitics


Re: ‘Energy field set to change game’ NBR Feb 15

You list Saudi Arabia as having 262M barrels. They, of course, have (possibly) 262 Billion.
If Aust had 500 times Saudi’s reserves, this would transform the world.  Arckaringa’s 133-233B merely transforms Aust. It puts Aust just behind Venezuela and beside Iraq.
Fracking is hard so maybe only 50B is extractable, and at a high price per barrel  - however what this will do to Australia’s GDP and A$ is of course fascinating.
You fail to mention that international geopolitics change - if more reserves are found in the stable West (or even Russia) – then why bother supporting militarily any of the Middle East countries?


Michael Naylor

Hi Michael,

Yes, unfortunately this was a misprint. In the printing and editing confusion, a ‘b’ was replaced with an ‘m’. Reading it with a ‘m’ does change the force of the article a bit. This has since been updated. Good spotting, nice to know our readers have a great eye for detail!

What you must take into consideration is where this new energy is coming from. Both Venezuela and Iraq are unstable at best and underdeveloped at worst. They both sit in politically dangerous regions of the world with very little municipal infrastructure. Even their energy industries are aging and only slowly being upgraded, especially in Venezuela. Iraq is now implicitly controlled by Iranian interests, as is Syria, driving the incentive for the rest of the world to develop alternate energy sources as quickly as possible. America may be deeply entangled in the Middle East at the moment, with this legacy stretching back 50 years, but their reasons for sticking around are growing less and less convincing by the year.

The United States, East Asia, and Europe have had to rely on Middle East and South American energy for decades due largely to a lack of alternate options. Now that Europe, North America, and the South Pacific are each finding their own reserves of energy, and all possess the ability to extract this energy with new technology, the reliance on the Middle East should dissipate in the future.

You’re correct that only a fraction of Australia’s new energy in Arckaringa will be extractable. But this is based on current extraction techniques and the remoteness of the fields. Given the way technology is evolving though, it’s not hard to predict that some new form of extraction will be developed that will increase the output. And since we’re probably going to be reliant on fossil fuels for at least another few decades, the financial incentive will remain to develop new techniques.

I am also in absolute agreement with your last paragraph. You’ll have to appreciate the space constraints for each article, there’s only so much I can fit in!

But essentially, with the size of the fields being discovered in Canada, North America, and Australia, the Western developed world stands a good chance of bringing the energy monopoly over to their hemisphere and away from the restive Middle East. US military presence in the Persian Gulf and Middle East are currently designed to ensure the safe delivery of energy into world markets, not necessarily just the US market. The US are not the only country that benefits from their military deployments.

For example, early last year, when Iran was threatening to close the Strait of Hormuz to frustrate American strategists and US market recovery, it was China, Japan, South Korea, and India who complained the loudest. They are the ones receiving the majority of Persian and Arabian energy through the Strait, not the Americans. But none of these nations possess the ability to dispatch warships to the region to ensure this. It has been up to the American’s to keep sea trading lanes open since the end of World War II. Sure, they do this for their own interests, but safe energy delivery for the world’s markets is actually in the American interest too.

Removing the potential for market fluctuations arising from unrest in the Middle East has been a strategic imperative for decades, but is only now becoming a true possibility. With the trio of Canada, America, and Australia bringing their large fields online, the world can assume to receive fairly consistent flow of energy for the foreseeable future from politically stable governments. This radically changes the geopolitics of the world system. Suddenly Mackinder’s “World Island” becomes less important for global energy development.

I’ve written on the NBR website about Russia’s problems in the energy sector. But basically, as I’m in no doubt you’re aware, Europe’s dependence on Russian energy is gradually falling. Not only have EU members discovered their own energy fields accessible with fracking technology, Russian energy is now competing with American energy over price. And American energy is much more attractive because it doesn’t come with the danger of Russian control over pipelines.


Nathan Smith


The geo-strategy issues are worth of a separate article. With the US facing bankruptcy, with drones talking terrorists,  and very few reasons to remain in the gulf, they cannot remain Asia’s army for hire much longer.
The rise in energy demand in Asia will ensure that energy remains at around $100/ barrel, but;

       1)      Just as the British slowly withdrew, the US will, with equal agonizing. They may not want to withdrew but financially they cannot stay. The US time has ended.
       2)      That leaves China to enforce its own energy routes – with interesting consequences. The Europeans won’t help – they will rely on other sources.
       3)      If the money drops, then the Saudi family faces losing control, and the possible rise of the Salfists. The rising population in Saudi Arabia will  cause its downfall anyway but lack of US support doesn’t help.

The scenarios are worth outlining, because fracking will change the world and very few NZers are aware of this. Or that NZ has per capita more frackable resources than most countries.


Michael Naylor

Hi Michael,

I’m not completely across the US financial situation in the recent past, but I do want to emphasise a few points. The United States economy is larger than the next three biggest economies combined, and this hasn’t really changed at all since the 2008 crisis. This gives America incredible power over the world system. Whether or not their current strategy of printing greenback can continue indefinitely remains to be seen, although I doubt it can. But their economy still has a lot of movement to absorb this liquidity.

Also, I’m not really seeing the present downturn economically as a long-term trend. Sure, world powers are tightening their belts and not pursuing failed investments, or at least only doing so in limited capacity. But new revenue streams are appearing and technology inexorably advances. Not to mention the rise in global population, which will give us more workers to generate capital. So things are collectively looking up. After all, simple economics suggests the more people we have, the more money can be generated and the more chances we have of inventing new technology to drive yet more capital growth. It’s a feedback loop.

And while America may be aging demographically, as are many other advanced nations, immigration of young workers from developing countries should continue to stimulate growth in advanced societies. I leave the sociological questions aside as I don’t find them too important. The constraints in and the nature of geopolitics being what they are, changes in one’s culture aren’t likely to affect the trajectory of national interaction. At least, that’s the way things appear.

Between you and I, drones are a slippery slope in my opinion. There simply isn’t any long term strategic conclusion when one uses them. The strategy is devoid of direction. Washington is quickly realising that the old canard of “never fight a land war in Asia” was correct all along. Thankfully, for both the American people and their treasury, the US will be largely pulling back into an isolationist role for at least the short-term. But I’m unconvinced this is as good as it sounds. Without American troops to deter some particularly nationalistic countries from acting on their ambitions, things could get rough in that region.

Asian energy demand will certainly stagnate oil prices, yet with the trend of Indian middle-class booms, energy prices will probably rise. Could China defend its own energy routes? Not right now. Their blue water fleet is not nearly capable enough and the United States may be withdrawing from Asia, but they have not abdicated control of the world’s oceans. And poor Europe, they’ve relied for far too long on protection from the United States. Their military equipment is so dilapidated and light that they couldn’t even control a quick fight against a weakened Libya, and France can barely contain Mali. Not to mention their attitude to all things military is far more ambivalent than even our own.

Saudi Arabia is in for a rough ride through the next twenty years. The new generation of leaders in the monarchy will struggle to control the status quo. They’ll probably have to adapt or prepare to lose significant ground. My money’s on adapt. Above this, the United States aren’t likely to extract themselves completely from Saudi Arabia. Their presence does not strictly protect the Saudi’s from attack, after all the Americans are there more to prevent the Saudis from using their significant wealth to create their own powerful military. If the Americans were to leave completely, all the regional players would rush to fill the vacuum. This is what has happened after the Iraq withdrawal. Out of these battles, a victor generally emerges, which would create a regional hegemon and cause significant problems for the world. American troops remove the incentive to for the Saudis to buy guns to counter Iran or Egypt or Iraq. I can see similar things happen in Asia in the worst-case scenario if the US were to pull out completely.

If New Zealand can leverage its energy resources in good time, we may be in with a shot. But our distance from large markets might pose more of a problem than Australia’s. The Aussies and Americans can probably offset such drawbacks with the size of their economies, but I think we’d struggle. I’m looking forward to having some of this energy used domestically, but even this might be a pipedream. 

Nathan Smith

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