How unconventional oil changes the world

The hype that says that this will all replace coal without any government intervention, gas prices will be $3 forever, or that we will be the dominant exporter in the world, are out of contact with reality. We have temporarily depressed prices, they will rise a bit. Hype always has the ability and the tendency to outstrip reality, but in this case, reality is pretty radical itself.

James Stafford: Could the shale boom lead to a change in US foreign policy priorities, away from the Middle East?

Michael Levi: An economic analyst will typically tell you that the US shale boom will fundamentally change US vulnerability to energy events in the Middle East. But not every policymaker listens to their economic advisors.

I do not think that US policymakers will step back and say, 'We need to revisit our strategy in the world, because of this oil boom.' I do think that what is happening will weigh on ongoing
discussions that already exist about future US priorities.

The most obvious one is the discussion from the US Department of Defense over how much to shift from the Middle East to Asia. Within that existing debate, I have no doubt that people who want to see more of a shift will emphasize what is happening in US energy. I think it will have some influence, but ultimately, I do not see a radical change as being likely.

James Stafford: Now that Barack Obama has won a second term, what do you see happening with the Keystone XL Pipeline? Will it go ahead? Is it essential to US energy security?

Michael Levi: I made a prediction once on the Keystone XL Pipeline, so I have lost my license to make future predictions. The Keystone XL Pipeline is non-essential to US energy security; it is also not disastrous to climate change. It has been overblown by both sides in the debate. It is one pipeline that would carry a modest, but non-trivial amount of crude, and that would help create economic incentives to increase production, again, by a modest but not earth-shattering amount.

The more fundamental question is whether the US is going to let economically-rational infrastructure go ahead. I think if you replicate a pattern like the one that some would like to see for Keystone and you start blocking pipelines all over the place, then that becomes a larger economic problem.

In the end, will it make the US more secure in any meaningful way? I doubt it. Prices for Canadian oil rose more during the Libya conflict than the prices for Brent Crude, or WTI. It is hard to say that Canada gives the US potentially more security aside from in extreme circumstances.

James Stafford: One would have thought that the natural gas boom would be good for the environment, but the cheap gas prices have also hit coal prices, and we are seeing Europe sucking up unused US coal. Is this a trend we can expect to continue?

Michael Levi: I think it is a trend we can expect to continue to some extent, particularly if Europe does not make stronger moves away from coal. The state of our knowledge about global coal markets is pathetic. All we can say right now is, directionally, more gas in the US means cheaper coal, which leads to more exports, but we are still far from being able to really put quantitative meat on those bones, and making some meaningful net assessment.

James Stafford: What do you believe is the best way to achieve meaningful results on climate change? How much of an influence will Hurricane Sandy have on this debate?