The last time the United States extracted 10 million barrels of crude a day, Richard Nixon lived in the White House. The first oil crisis had not yet reached the Americans, who were happy buying cars, and fracking was an experimental technique that a handful of engineers tried, with little success, to popularize. It was 1970 and the barrel was sold at one dollar and eighty cents.
Almost five decades later, with oil hovering around 65 dollars per barrel, the daily production of crude oil in the United States is about to reach the eight-digit mark again. It is an important milestone in the realization of a dream that a generation ago seemed unlikely: by the end of 2018, the United States could be the world’s largest oil producer. And with that, the country is approaching energy independence.
The US rise to the top of a mountain for a long time occupied by Saudi Arabia would shake geopolitics. A new world energy order could emerge that would be good for the United States, but not so much for the planet.
On the one hand, the influence of one of the most powerful forces of the last half century, the modern petro-state, would diminish. The diplomats of the “America First” no longer have to walk with feet of lead with oil nations like Saudi Arabia. The Organization of the Petroleum Exporting Countries (OPEC) would find it more difficult to reach an agreement on the production guidelines, which would lead to lower prices and reopen old wounds in the cartel. That would detract from Vladimir Putin’s foreign policy, while the Russian oligarchs would find it harder to maintain the lifestyle they have become accustomed to.
President Donald Trump, looking for the opportunity, wants more than independence, wants what he calls “energetic domain”. His administration plans to open a large oceanic expanse to marine exploration and, for the first time in 40 years, allow drilling at the Arctic National Wildlife Refuge. Its exploitation may take years, but Alaska’s oil reserves are huge and are estimated at 11,800 million barrels of crude oil.
It sounds good, but you have to be careful what you want. The last three years have been the hottest since registration began in the 19th century and in Trump’s plan there is little room for energy sources friendly to the planet. The governors of the coastal states have already pointed out that a spill in the sea could devastate tourism, another billion-dollar industry, not to mention the fragile coastal environments.
Florida has already requested an exemption for such drilling. Higher supply could lower prices, discouraging investments in renewable energy, which increase when oil prices rise. If the price of oil falls, enthusiasm for clean energy could also fall.
For now, however, the oil train is moving forward. And we can thank the resilience of the US oil shale industry, as it is better known.
The triumph of the shale seemed impossible a few years ago. At the end of 2014, Saudi Arabia launched an offensive against its rivals, including the US oil companies. Instead of limiting production to keep prices high, the Saudis persuaded OPEC to open the taps, causing prices to fall below $ 40 per barrel in December, compared to more than $ 100 per barrel just four months ago. The Saudis hoped to stifle the shale revolution. At first, it seemed that they would succeed, as in the past. United States production fell from a maximum of 9 million 600 thousand barrels per day to 8 million 500 thousand barrels. Bankruptcies multiplied in the shale regions, from the Permian basin of Texas to the Bakken formation in North Dakota, and tens of thousands of workers lost their jobs.
Instead of declaring defeat, the shale companies attacked, cut costs and borrowed like crazy to continue drilling. By the end of 2016, the Saudis surrendered. They convinced OPEC and the Russians to reduce their production. Little by little, the West Texas Intermediate, the benchmark for US and Mexican oil, rose from $ 26 per barrel in February 2016 to its current price.
What did not kill the shale companies made them stronger. The survivors became more effective and faster versions that can prosper even at lower oil prices. The shale is no longer just sand, sweat and luck. Technology is key. Geologists use smartphones to direct drilling and companies are introducing increasingly longer wells. At current prices, shale producers can give mass and ring at the same time, simultaneously raising production and profits.
It has also improved hydraulic fracturing, or fracking, in the depths of the subsoil to release the hydrocarbon. It’s what many call Shale 2.0. And the pioneers who dominated the first phase of the revolution, such as Harold Hamm of Continental Resources Inc., are not the only ones who are benefiting from the boom. Exxon Mobil, Chevron and other large oil groups have joined the fever. The American shale “seems to be on steroids,” says Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London. “The market continues to be fascinated with the ability of shale producers to adapt to lower prices and keep growing.”
The results are historical. In October, net imports of crude and refined products in the United States fell to less than 2.5 million barrels per day, the lowest level since official data began to be collected in 1973. A decade ago, net oil imports They reached more than 12 million barrels per day. “Over the past forty years, since the Arab oil embargo, we have had a mentality of energy shortages,” says Jason Bordoff, founding director of the Center for Global Energy Policy at Columbia University. “As a result of the shale revolution, the United States has emerged as an energy superpower.”
For OPEC, the emerging superpower presents an unprecedented challenge. If the block cuts production, shale drillers can respond by increasing theirs, stealing the market share of OPEC nations and undermining their effort to manipulate prices. The only solution for OPEC is to continue with production cuts, as it is doing now, and hope for the best. If cooperation between OPEC and Russia breaks down, it is possible that OPEC will also fracture completely.
If shale production keeps prices low, Russia would be a big loser. Moscow used oil revenues to finance aggressive foreign intervention in Ukraine and Syria. The only solution is to continue cooperating with Saudi Arabia to keep production limited, despite the displeasure of the oligarchs.
Thanks to the shale, US imports of Saudi oil plummeted to a 30-year low in 2017. This radical shift makes China and Japan more dependent on the United States than Middle Eastern oil. And consequently, now the United States can argue that other countries should help bear the burden of monitoring the sea lanes leading to the oil-exporting countries of Asia and North Africa.
However, not all roads are cleared for the United States, the country is not immune to the ups and downs of the world market.
When the price rises due to a political upheaval in the Middle East, no matter where you are or how much you produce, the price also increases accordingly in the United States.
There is also another problem: the shale industry, the so-called Shale 2.0, could harm refineries. Shale oil is too good. For years, US refiners spent billions of dollars on special equipment to process the dense, high-sulfur, low-quality crude oils from Mexico, Venezuela, Canada and Saudi Arabia. The quality of shale oil is so high that it produces little diesel, the fuel that fuels manufacturing.
Such limitations can be mere setbacks. But US domination is far from being a panacea. It will not reverse climate change. The political influence of fossil fuel producers in Washington will not diminish. Nor will it completely neutralize the political influence of erratic petro-states.
With the growing demand despite the emergence of renewable energy and the development of electric vehicles, the shale may have difficulties to keep pace with global consumption.
There is a chance that the world will witness the rarest contradiction in the market: high oil prices along with increased US production.
Then Saudi Arabia and Russia could continue to be formidable obstacles to the energy independence of the United States. They would dominate from the top of the hilltop even as they watch the ‘Yankee’ producers of shale.
These are problems that could hardly have been imagined by Americans who stood in long lines to fill their tanks in the 1970s, when the idea of the United States defining its own energy future was only a dream. Any celebration of this achievement ignores the evidence that such a dependence on fossil fuels is not independence at all.
Source: El Financiero