The United States’ Growing Supply of Natural Gas Has Foreign Policy Implications

Developments in the natural gas industry, such as improved shale-gas technology, have put the United States on course to be the world’s largest producer.  Much attention has been paid to the economic and environmental aspects of this development.  However, there are key foreign policy implications as well.  Most obviously, the country’s increased energy output makes it more difficult for a rival to hold the country economically hostage, as OPEC did in the 1970s.  In addition, countries who deal with nations such as Iran solely to ensure access to energy will be more open to dealing with the United States if they are no longer dependent on Iran for natural gas or oil.  Finally, the increased supply of natural gas should accelerate the “de-coupling” of natural gas and oil prices.  In many parts of the world, natural gas prices are essentially a percentage of oil prices, which causes inefficiencies.  For example, the price of oil reflects a risk premium due to the perpetually-volatile situation in the Middle East.  But U.S. gas prices are tied to the Henry Hub index and should not reflect the risk premium that foreign oil prices do.

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