Friday, September 9, 2016
Far from being threatened by recent weak prices, the status of the U.S. as an emerging energy superpower has solidified in 2016, weakening OPEC’s grip over the oil market along with Russia’s influence over Europe’s gas supplies, writes The National Interest magazine.
For the next president, the geopolitical environment could look a lot more benign—should the nation’s energy industry continue on its current path. The shale revolution in the U.S. is rapidly overturning the old order, and the dust has yet to settle. The magazine notes that for decades it was thought U.S. oil production had peaked around 1970, as 30 years of declining production set in and the OPEC cartel’s manipulation of oil supply and prices gave a number of politically sensitive regions an uncomfortably large degree of influence over global markets.
But in 2009, driven by the newly economically viable hydraulic fracturing extraction method, U.S. oil production rose, and it kept rising until worldwide over-supply forced domestic production cuts last year. After initially downplaying shale’s potential to rival OPEC’s monopoly, Saudi Arabia launched what is widely seen as a price war against U.S. producers in 2014. It refused to cut production when many other OPEC members lobbied to do so. The Saudis contended they were merely letting the market take its course. The result was a glut in global supplies, and the Saudis’ own production has hit all-time highs.
“But while their strategy of oversupply may have made some high-cost operators economically unviable, including those in OPEC member states Angola, Nigeria, and Venezuela, U.S. shale extractors have proven highly adept at cutting costs,” The National Interest observes. “This has opened up a profit margin even below that which Saudi Arabia needs to fund its welfare state, which the International Monetary Fund believes could go bankrupt in five years without major policy changes.”
New projects using traditional extraction methods typically have a five-year lead time and a 10-year payback time, while many new shale projects have only a one-year lead time and an 18-month payback time. In addition, the ease of developing new projects, and of increasing or decreasing supply to meet demand, has drastically flattened the supply curve of the global oil market, thereby weakening OPEC’s power to manipulate prices.
Further, 10 years ago Russia, Qatar, and Iran were the established gas giants, together owning 57% of global conventional gas reserves and forming the core of the Gas Exporting Countries Forum (GECF), known as the gas OPEC, the magazine comments. In 2005, the Energy Information Administration (EIA) forecast the U.S. would have to import 25% of its daily gas consumption in 2015. However, thanks to shale gas the nation is now expected to be a net exporter by next year.
In February 2016, LNG exports commenced from Cheniere Energy’s Sabine Pass plant in Louisiana with destinations in South America, India, and notably the gas-rich United Arab Emirates and Kuwait, where a lack of investment and surging demand has prompted the need for the Middle East nations to turn to U.S. supply.
Thwarting GECF from becoming a global gas cartel, and reversing the flow of gas between the U.S. and the Middle East, are seismic shifts in the global energy sector. But perhaps shale gas’s most far-reaching impact will be reducing Europe’s energy dependence on Russia.
Finally, The National Interest underscores that the financial windfall from ramped-up U.S. energy exports is significant. Gas exports alone could inject between $7 billion and $20 billion a year into the domestic economy. “If U.S. shale can withstand domestic political pressure against hydraulic fracturing, and regulatory incentives promoting a shift to renewable energies, it stands to disrupt OPEC’s global oil cartel and Russia’s strong influence in Europe, and establish the United States as the new global energy superpower.”
For the next president, the geopolitical environment could look a lot more benign—should the nation’s energy industry continue on its current path. The shale revolution in the U.S. is rapidly overturning the old order, and the dust has yet to settle. The magazine notes that for decades it was thought U.S. oil production had peaked around 1970, as 30 years of declining production set in and the OPEC cartel’s manipulation of oil supply and prices gave a number of politically sensitive regions an uncomfortably large degree of influence over global markets.
But in 2009, driven by the newly economically viable hydraulic fracturing extraction method, U.S. oil production rose, and it kept rising until worldwide over-supply forced domestic production cuts last year. After initially downplaying shale’s potential to rival OPEC’s monopoly, Saudi Arabia launched what is widely seen as a price war against U.S. producers in 2014. It refused to cut production when many other OPEC members lobbied to do so. The Saudis contended they were merely letting the market take its course. The result was a glut in global supplies, and the Saudis’ own production has hit all-time highs.
“But while their strategy of oversupply may have made some high-cost operators economically unviable, including those in OPEC member states Angola, Nigeria, and Venezuela, U.S. shale extractors have proven highly adept at cutting costs,” The National Interest observes. “This has opened up a profit margin even below that which Saudi Arabia needs to fund its welfare state, which the International Monetary Fund believes could go bankrupt in five years without major policy changes.”
New projects using traditional extraction methods typically have a five-year lead time and a 10-year payback time, while many new shale projects have only a one-year lead time and an 18-month payback time. In addition, the ease of developing new projects, and of increasing or decreasing supply to meet demand, has drastically flattened the supply curve of the global oil market, thereby weakening OPEC’s power to manipulate prices.
Further, 10 years ago Russia, Qatar, and Iran were the established gas giants, together owning 57% of global conventional gas reserves and forming the core of the Gas Exporting Countries Forum (GECF), known as the gas OPEC, the magazine comments. In 2005, the Energy Information Administration (EIA) forecast the U.S. would have to import 25% of its daily gas consumption in 2015. However, thanks to shale gas the nation is now expected to be a net exporter by next year.
In February 2016, LNG exports commenced from Cheniere Energy’s Sabine Pass plant in Louisiana with destinations in South America, India, and notably the gas-rich United Arab Emirates and Kuwait, where a lack of investment and surging demand has prompted the need for the Middle East nations to turn to U.S. supply.
Thwarting GECF from becoming a global gas cartel, and reversing the flow of gas between the U.S. and the Middle East, are seismic shifts in the global energy sector. But perhaps shale gas’s most far-reaching impact will be reducing Europe’s energy dependence on Russia.
Finally, The National Interest underscores that the financial windfall from ramped-up U.S. energy exports is significant. Gas exports alone could inject between $7 billion and $20 billion a year into the domestic economy. “If U.S. shale can withstand domestic political pressure against hydraulic fracturing, and regulatory incentives promoting a shift to renewable energies, it stands to disrupt OPEC’s global oil cartel and Russia’s strong influence in Europe, and establish the United States as the new global energy superpower.”
