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America's New Super Weapon is Shifting the Balance of Power

By Matthew DiLallo – Mar 9, 2014 at 1:20PM

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Oil and natural gas leverage can now be used geopolitically rather than turning to expensive military force.

Photo credit: Flickr/US Navy photo by: Photographer's Mate Third Class Craig R. Spiering. Released by HST Public Affairs 

America has long had the world's top military. As of last year we had 1.4 million active frontline military personnel, with another 850,000 in the reserves. We have more than 8,000 tanks, over 13,500 aircraft and 10 aircraft carriers. Our defense budget last year was more than $600 billion.

While our nearest military rival, Russia, has twice as many tanks as we do, their military is outgunned by a two-to-one ratio when comparing active frontline personnel. America also has over 10,000 more aircraft than Russia does and 9 more aircraft carriers. That happens when we spend an astounding $500 billion more than the Russians do each year on our defense budget.

Our new super weapon
That said, our newest weapon in the battle of military might isn't even a line item in our massive defense budget. Instead, it's the enormous oil and gas reserves we've unlocked thanks to the combination of horizontal drilling and hydraulic fracturing. Because our oil and natural gas production is surging, traditional powerhouses like Russia that have used their own production as leverage during negotiation in the past are running out of options.


Photo credit: Flickr/Tony Alter 

By next year we're expected to overtake both Saudi Arabia and Russia as the world's top producer of oil according to the International Energy Agency. Thanks to shale gas we already produce more natural gas than Russia, which is the world's second largest producer of natural gas. Because of that we should be close to energy self-sufficient for at least the next two decades.

What this weapon does is give President Obama options that no U.S. president has had in recent years. Russia, for example, has twice flexed its muscles by shutting off natural gas supplies to the Ukraine and Europe. However, now because of our vast natural gas supplies we can disarm the very energy weapon Russia has used in the past with an energy weapon of our own. This is why in response to Russia's recent moves in the Ukraine, House Speaker John Boehner said that, "one immediate step the president can and should take is to dramatically expedite the approval of U.S. exports of natural gas."

Building our arsenal
Currently the energy industry is looking to build several natural gas export facilities along the East Coast. These facilities could prove to be important in disarming future aggression from Russia. Current projects include Dominion's (D 0.88%) Cove Point LNG facility in Maryland and a partnership between Kinder Morgan (KMI 0.52%) and Royal Dutch Shell (RDS.A) (RDS.B) on the Elba Island LNG Terminal near Savannah, Ga. These projects are in addition to a number of projects along the Gulf Coast.

Dominion's Cove Point LNG facility. Photo credit: Flickr/ 

While these projects will be built with fixed price contracts and most of the gas will be exported to Asia, the impact of U.S. natural gas exports will be felt by world energy markets. As cheaper U.S. natural gas starts flowing into the world markets it should cause the price of gas to fall across the globe even as it rises slightly in the U.S. That would act as an economic fuel for the U.S. economy while creating a drag on the profits of Russian gas producers and therefore the Russian economy. Not only that, but we do have the option of stockpiling gas and building additional export capacity as a strategic reserved to be used to disarm future aggression where energy is the weapon of choice. 

Final thoughts
Our energy revolution is beginning to tilt the balance of power back to the U.S. We'll soon not only have the world's top military, but we'll increase its power by becoming the world's largest producer of both oil and gas. Because of that our greatest strength might no longer be our military might.

OPEC is taking notice

Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Dominion Resources and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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