Squandering Bismarck’s Law: US Energy Policy Under Donald Trump

“God protects Fools, Children, and the United States of America.”

                                             –Otto von Bismarck (likely apocryphal)

 Introduction: The Meaning Behind Bismarck’s Law

 The edgy (and very funny) quotation at the head of this article is believed by much of the world. Foreigners have long had an in-joke—probably incorrectly attributed to Otto von Bismarck—about America’s obliviousness to its own fantastic luck. There is a modern technological corollary to Bismarck’s Law of America’s great good fortune. Despite the fact that European elites are broadly as well educated as their American counterparts (I myself went to St. Andrews University in Scotland), why is it that the US monopolises the game-changing innovators of the modern world, creating the people that in turn bring into being whole new cutting-edge industries out of nothing?

America has Alexander Graham Bell, Thomas Edison, Henry Ford, Bill Gates and Steve Jobs to its credit. This is an innovative first team unmatched in modern history. To many outsiders, this is just another sign that America (perhaps unfairly) is smiled upon by the gods.

Frankly, in Bismarck’s supposed quote, there is more than a little envy at work. Yes, America has been blessed by great good fortune, but as my new book, To Dare More Boldly: The Audacious Story of Political Risk, makes clear, far-sighted visionaries have made the most of it. For there are numerous practical reasons for the US’s ‘luck’ in terms of innovation. One of them revolves around a story I have recounted at a number of conferences, that while the American government did little to sponsor the Henry Ford or Steve Jobs, at least they beneficially left them alone.

Think of the practical work of creation, of Steve Jobs and Steve Wozniak tinkering away in Jobs’ garage, perfecting the personal computer. They simply couldn’t have done so in Europe. With its mania for over-regulation, working in a garage would have been forbidden, being considered an ‘unsafe work space.’ Yes, the more we look at America’s luck, the more the story regarding fabled Red Sox slugger Ted Williams comes to mind. Late in his career, Williams had a lucky bounce of the baseball and found himself with an undeserved hit. A rookie said to him, ‘Gee, Mr. Williams, that sure was lucky.’ The dour Hall of Famer replied, ‘The more I practice, kid, the luckier I get.’

Americans’ advantage is that they have been allowed to practice, to tinker at things, to dream and to realise those dreams, with the government (at its best) merely shrouding them in benign neglect. The country’s genius has not been primarily located in the public sphere—I can name many more bad presidents than good ones–but rather in the practical wisdom that if government leaves its people alone, their private, commercial genius will drive everything.

We who practice foreign policy analysis have an in-built bias towards public and governmental—rather than private and commercial—actions. It is what we have grown up studying and assessing, and where we are at our most comfortable. But such a statist interpretation of the world does not begin to fully explain a country such as America, with its genius for non-governmental, commercial solutions.

The shale revolution that occurred during the time of the Obama administration–with it again practicing the blessed innovative principal of benign neglect–is a case in point. Fracking, or hydraulic fracturing—using water and other liquids at high pressures to far more efficiently and cheaply force residual oil and gas to the surface through existing fissures—has utterly transformed the global energy industry.

Suddenly wells and whole fields of gas and oil that had proven uneconomical just years before were made viable across the American West, from Texas to North Dakota. This was a private, commercial engineering initiative that evolved over decades, and all without much (thank God) governmental involvement. Nevertheless, this revolution and its fruits have landed squarely, luckily, in Donald Trump’s lap. So looking at whatever President Trump’s energy strategy might be is entirely beside the point; it is the private, commercial shale revolution that matters for America and the rest of the world.

The Shale Revolution as game changer

 It is almost impossible to overestimate the importance of the shale boom. The numbers tell the tale and they amount to a revolution that has almost incalculable geopolitical and macroeconomic consequences for a world that has largely missed its monumental significance. With the advent of fracking, US oil production has increased 80% over the last decade. The US Department of Energy estimates that in 2018 American production levels will reach 10.3 million barrels per day (bpd), besting the all-time record set in faraway 1970. Of this fully 2 million bpd will be exported. The gas industry is being revolutionised too. By 2015, more than half of all gas produced in the US came from shale.

Nor is the shale boom a flash in the pan. The US Energy Department estimates that America has enough shale gas reserves (coupled with oil and other gas resources) to last for two centuries. Quite amazingly, the International Energy Agency (IEA) forecasts that US oil production is set to top that of energy superpowers Saudi Arabia and Russia in 2018, with more than 80% of global energy supply growth likely to come from the US in the next decade. Staggeringly, by the 2020’s, the IEA expects North America to be self-sufficient in energy.

The Permian Basin in west Texas, accessed through the fracking engineering revolution, is estimated to have as much oil beneath it as Ghawar, the largest field in Saudi Arabia. Further, the oil is far cheaper to extract than are the riches in most countries within OPEC countries. Almost overnight, the United States has risen phoenix-like from energy mendicant to transform itself into one of the global big three (along with Russia and Riyadh), a determiner of the global price of energy.

It would seem Bismarck’s Law holds regarding America’s endless luck. Just a few years ago, everyone thought the US would be perpetually consigned to be an energy importer for the foreseeable future, with all the geo-economic and geopolitical risk that entails. Suddenly, seemingly magically, in a blink of an historical eye, America finds itself one of the major energy producers of the world.

The Saudi’s Rockefeller Gambit fails to kill the Shale Revolution at its birth

 There are two great geo-economic takeaways from the advent of the Shale Revolution. First, the Saudis—until now the world’s primary energy superpower—have definitively failed to kill the Shale Revolution at its birth. Nothing can stop it now. Second, in trying to do so, Saudi Arabia unwittingly made shale the new ceiling for global energy prices for the foreseeable future.

Initially the Saudis attempted to kill shale, playing a version of a very old business game. Their John D. Rockefeller energy strategy—named for the late nineteenth/early twentieth century oil monopolist who would force overall oil production up (taking a temporary loss) and prices temporarily down in service of the greater goal of driving his competitors out of business and thereby boosting his overall market share over time—failed to work. While the price of oil plummeted a dizzying 70% from its June 2014 highs of $120 a barrel to a trough of just over $30 a barrel, shale did not throw in the towel.

 Constant shale productivity gains meant that US output fell only moderately, from a still impressive total at the time of over 9 million bpd. Also, turning shale wells on and off is far less expensive than regarding the fixed-rig wells in Saudi Arabia and the rest of OPEC, making shale for more price sensitive, as wells can be turned on and off like a faucet. In response, the Saudis were forced to suspend their game of energy chicken, instead giving into the inevitable, reversing course, with OPEC (and the help of an equally hard-pressed Russia) now cutting production frantically to limit the financial damage to its members. The September 2016 OPEC deal to cut oil output amounts to nothing less than Saudi Arabia’s surrender to the power of American shale.

The self-inflicted wounds of Riyadh’s Rockefeller strategy have driven the Saudis to economic extremes unthought-of in recent years. In 2015, the Saudi budget deficit amounted to $98 billion, or a whopping 15% of its GDP. While Riyadh has mountainous reserves, it needs the price of oil—the sole motor of its economy—to fetch around $85 a barrel to adequately finance public spending. Despite significant price increases of 35% over the last six months of 2017, this figure is still barely on the horizon today.

While the temporary anti-shale Russian-Saudi alliance, first put in place in September 2016, has proved remarkably durable–with both powers agreeing to keep cuts in place of 1.8m bpd until the end of 2018–it is now clear that nothing will be able to put the shale genie back into the bottle. A year on from the deal, shale production had actually increased by a very healthy 10.8%, year on year. While the Russia-OPEC deal has put a floor on the global energy price of around $50 a barrel, the shale revolution has surely put a ceiling on the global energy price, meaning energy prices will travel in a far narrower band than in the past.

The Saudi Sisyphus and the end of an era

Rather, the young, feckless Crown Prince Mohammed bin Salman (MBS), has blundered, as employing Saudi Arabia’s John D. Rockefeller strategy to permanently drive US shale out of the energy market has led to the exact opposite result. Unwittingly, the Saudis have made the Americans the new global energy swing producer, the permanent ceiling for the global price of oil. For just as prices inevitably rise due to Saudi and Russian cuts, more shale wells come online, stabilising the global energy price. Like the mythological Greek figure of torture, Sisyphus, MBS will roll the boulder of energy price increases up a hill, only to have it perennially tumble down as shale production increases in turn, over and over again.

 This, in its way, is as momentous a shift in global power as the stunning Brexit and Donald Trump political ructions. Whereas Brexit showed Europe to be in absolute decline, and the election of President Trump brings to an abrupt end 70 years of the US as the global ordering power, the Saudi’s meek surrender brings to a close the long age of the OPEC domination of the world’s energy market. The year 2016 truly saw the death of one world order, and the uncertain birth of another.

The boundless geopolitical riches from the shale revolution

 Coupled with the tar sands energy boom in Canada and the liberalisation of Pemex, Mexico’s heretofore state-controlled oil company, North America now stands as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. If properly grasped, this is a geopolitical treasure almost beyond measure. Imagine the decrease in political risk if, instead of having to primarily focus the chaos of the Middle East in terms of securing its energy supplies, the US has to concentrate only on Mexico and Canada.

 The second great geostrategic benefit flows from the first. For the first time in modern history, the US will not have to worry overmuch about the Middle East (and with such tragic results). American imports from OPEC decreased a significant 20% from late 2016 to late 2017, due to the Shale Revolution. At last, a policy of off-shore balancing vis-a-vis that snake pit of a region, the graveyard of presidencies, is possible.

 Third, the shale boom will dramatically turn the US into a net exporter of energy, able to use its exports as a tool of geopolitics. This strategy involves supplying hard-pressed Eastern Europe with more of its energy needs over time (as of April 2018, Moscow accounts for fully one-third of Europe’s gas needs), so they are no longer at the tender mercies of the Russians. This will surely decrease the Kremlin’s sway over Europe as a whole.

It also means it will be possible to entice energy-starved China into buying American shale exports. Over time, this newfound dependence would make it far less likely Beijing emerges as a revolutionary power, as it is unlikely to want to come to blows with a newfound vital energy supplier. It also makes the possibility of a full-blown Sino-Russian alliance, the only power configuration in the near term that can challenge US global dominance, far less likely.

 Conclusion: President Trump and the confounding of Bismarck’s Law

But no amount of luck—even paired with the genius of leaving one’s people alone to be creative–can survive disastrous statesmanship. And the defiantly wrongheaded foreign policy of Donald Trump puts at great risk almost every geostrategic treasure offered up to the US by the shale revolution.

First, in threatening the future of the wildly successful NAFTA accord, the Trump White House endangers not just the significant continental gains made so far, but also imperils the glittering prospects of North American consolidation of near-energy independence in the medium term. For it is highly unlikely either Mexico City or Ottawa will want to formalise consolidating energy ties with a US that has just shown itself to be such a fickle and unreliable economic partner.

Second, the same goes for the White House’s threatened trade war with China. While there is no doubt that Beijing has not played fair in many ways in terms of its trading regime—from habitual intellectual property theft to endowing lavish subsidies on state-owned enterprises. However, by unilaterally threatening up to $150 billion in tariffs (and actually imposing a 25% tariff on Chinese steel and a 15% tariff on aluminium) the Trump administration is not taking the longer-term picture into account.

To put it mildly, Beijing, so ripe to be won over due to its pressing energy needs and the advent of US shale, will not turn to the US for its long-term energy supplies in the midst of a trade war. The geostrategic losses could be incalculable.

Third, by ignoring the Obama administration’s efforts to extricate the US from the cesspool of the Middle East and instead reverting to form in mindlessly supporting Saudi Arabia, President Trump has increased the American footprint in a region when it is both unnecessary (offering the US with little strategic gain) and highly perilous. The US fiddles in the Middle East, while the primary geostrategic arena has decisively shifted to Asia, where most of the world’s future growth will come from, along with much of its political risk. The shale revolution provided the US with an elegant reason to truly pivot away from the Middle East. Yet sadly, and for no gain, this opportunity is being tragically ignored.

There is absolutely no doubt that Bismarck’s law holds: Through a combination of great good luck and the skill of believing in the genius of its people, the United States has been given the Holy Grail that is the Shale Revolution. The tragedy is that all this good fortune is being squandered by a president who remains resolutely determined not to let facts get in the way of his theories.

A version of this was published in the June edition of Aspenia.

Dr. John C. Hulsman is the President and Co-Founder of John C. Hulsman Enterprises (www.john-hulsman.com), a prominent global political risk consulting firm. His most recent work, To Dare More Boldly; The Audacious Story of Political Risk, was just published by Princeton University Press in April 2018 and is now available on Amazon.