Quantifying Alignment: The Energy-Arms Substitute: An Empirical Study of the Effects of Energy-Interdependence on Bilateral Arms Transfers and Sovereign Debt Risk.

Abstract

Energy has long been theorized as an instrument of geopolitical alignment. Yet, its causal effects on bilateral security partnerships remain poorly understood. Our research uses the mid-2000s U.S. Shale Revolution as an exogenous supply shock to causally identify the effects of rising energy-interdependence on two measures of strategic alignment: interstate arms transfers and credit default swap (CDS) spreads on sovereign debt. Using a shift-share Bartik instrument across a panel of forty countries from 2000 to 2024, our findings suggest that increasing energy-interdependence causally reduces bilateral arms transfers from the U.S. to its clients. Moreover, this effect deepens over time with a standard deviation rise in interdependence causally reducing arms transfers by up to 88% in the lagged period. This effect is termed the Energy-Arms Substitute. To test this mechanism’s underlying assumptions, complementary regression sets using a monthly panel of sovereign debt CDS spreads reveal that greater energy-interdependence causally reduces sovereign risk perceptions in advanced markets by 23% and 30% across 5Y and 10Y CDS durations. Together, our findings suggest that U.S. energy exports function as a de facto security architecture for client states. These results directly impact outlooks for U.S. energy policies, alliance health metrics, and the renewable energy transition.