Some things are so obvious that we stare into the forest, missing the tree: When you're not beholding to anyone for any reason, you can't be influenced by them. So it is with the US and petroleum.
When the US was not importing vast quantities of crude oil to use to heat its homes and power its industries, make electricity, fuel its transportation needs and support its military, it could choose its friends, instead of kissing its enemies asses, in the hopes that they'd continue to sell us a resource on which we'd become dependent. So it became the latter, after we started to see slowing production of domestically produced oil in the 1950s, 60s and into the 70s, importing most of our petroleum needs. We thought that we'd reached what some would call "peak oil" and scientific theories were predominately that the earth would soon run out of the resource that had literally come to power and lubricate our economic machine.
We long suffered from having to bend to the will of those that supplied us what we needed and couldn't produce from within our borders. We put up with their belief systems that are incompatible with the Freedom, in which we believe and base our society upon. We hung out with despotic dictators who subverted the will and rights of their citizens, because we needed to purchase energy from them. And it looked as if it would always be that way.
But adversity and the increased cost of imported oil allowed innovation to take hold. Directional drilling was discovered and perfected for what appeared to be little to no apparent use, until hydraulic fracturing of typically shale rock formations allowed oil first and then methane gas to be released from that rock. As the process became "refined," costs to directionally drill and fracture shale to release oil and gas deposits, heretofore trapped in rock were discovered to cost nearly what imported gas and oil cost. Suddenly, over a period of about a decade, aided by governmental regulations that further increased the costs of importing oil into the US, the costs of "fracking" to produce oil and gas became VERY COMPETITIVE with imports of foreign oil.
A few lessons should be inserted at this point:
- Theories that are "generally accepted as fact" aren't necessarily true. While they may appear to have been true from the limited perspective that scientists may have had when the theory was published, technology can reopen the theory for debate or refutation.
- Hardships are often the catalyst that brings new ideas and technologies to fruition.
- Economic Hardships are often lessons for us to learn to be more diligent with our finances and to "waste not, want not" with our finances.
- Never believe that a new technology, for which you don't have current use is actually useless.
Monday 8 July 2019 4:37 am
How the US shale revolution changed the face of geopolitics
Dr John C. Hulsman is senior columnist at City A.M., a life member of the Council on Foreign Relations, and president of John C. Hulsman Enterprises. He can be reached for corporate speaking and private briefings at www.chartwellspeakers.com.
In theory, we all know that major technical revolutions change and fundamentally disrupt the face of the world we live in.
In practice, analysts of all stripes are too often glacially slow to realise this process when it is at work, let alone what it means.
These events (such as the advent of the mass-produced automobile and the personal computer) transcend their technical importance, having profound social, economic and even geopolitical ramifications – consequences that are far too often seen decades after they have actually come to pass.
The shale revolution is the latest case in point.
One of my proudest analytical moments came during my glorious first stint with City A.M., when we, from very early on, not only saw that the shale revolution was real, but that it was bound to overturn both the global energy market, and, equally importantly, the world of geopolitics.
There is nothing that has come to pass in the years since this claim was boldly stated in this newspaper that leads me to change our initial (then unheard-of) assessment.
Hydraulic fracturing, commonly called “fracking” – the process of injecting liquids at high pressure into subterranean rocks, widening existing fissures, and far more plentifully extracting oil and natural gas – has been such a technical game-changer.
It has transformed the US, by far its leading exponent, from a long-term energy mendicant into the largest producer of oil in the world, in the blink of an historical eye.
By contrast, hapless Europe has been loath to follow the American example, as environmental fears have overcome its desperate need for new energy sources. It remains the energy beggar that the US was just years ago.
US energy production has increased an eye-opening 140 per cent since the shale revolution took flight in 2008. In 2018, US crude oil production rose by a stratospheric 30 per cent, with natural gas production also up fully 12 per cent. American oil production reached an all-time high of 10.9m barrels per day last year.
These startling numbers simply don’t lie; the shale revolution is alive and well and here to stay.
Saudi Arabia, alarmed by the ramifications of the shale revolution, has tried to contain America’s disruptive presence on the global energy market scene.
First, the Saudis attempted a variation on what I call the “Rockefeller strategy”, following in the footsteps of America’s nineteenth-century energy titan in driving prices down by over-producing (at a loss) to try to force new competitors into bankruptcy and out of the market.
But the Saudi gambit backfired spectacularly, amounting to a serious self-inflicted wound in a country that needs oil prices to be around $80 a barrel to balance its bloated budget.
Shale production has proved to be far more price sensitive than old, fixed-rig dominated Saudi and Russian energy production. It can be turned on and off at a fraction of the fixed-rig price like a water faucet, depending on the global energy price. Fracking rigs shut down when the Saudis over-produced, only to restart as the price inevitably edged upwards.
Going in the opposite direction has not worked very well, either. Present Opec and Russian production cuts, while leading to a global energy price increase, have bequeathed to the Americans greater market share.
In ramping up production, the US has kept a ceiling on global oil prices. It is not too much to say that the shale revolution has left the US, and not Opec or Russia, with the potential to become the global energy swing producer – a change of gargantuan proportions.
The geopolitical ramifications of the shale revolution are as profound as they are ignored. Shale means that the US must focus far more of its attention on its own backyard. For if Mexico, Canada, and the US work in unison (as the new USMCA trade pact makes possible), the dream of North American energy independence is possible.
Gone should be the days of over-worrying about the Middle East (except as an offshore balancer), a major strategic windfall for an America determined to turn its attention to Asia, where much of the political risk and reward will be in the new era.
There, great power rival China finds itself far more dependent on energy production outside its borders, a very real handicap in the emerging superpower competition with the US.
The shale revolution is a major reason for America’s basic strategic realignment away from the Middle East and towards Eurasia in our new multipolar era. Its importance simply cannot be overstated, and demands understanding.
Main image credit: Getty
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.
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And so, while we once had to "walk a fine line" between our allies with whom we shared values and traditions and the despots with whom we traded our money for oil, we're now unencumbered by our need to trade with those who wanted our riches and chose to try to hurt and suvbjectigate our will for the sake of their oil riches. We are very much like a man who's had to live his life by a tight budget, while being in debt and raising a family and paying for a house, who suddenly finds himself flush with more money that he can spend, as his children fledge their nest, and the house is paid off. We have choices in what we can do with the extra cash on hand.
The wise man continues to live as if he still had debt, but saves the extra capital for a time of need. He usually spends more for pleasure, but eventually passes on what savings amount he didn't use to his heirs. I would hope that our leaders will look at this situation and the new position we find ourselves in and seek wisdom to make the right choices for our country in the future. However, as our representative republic gets a new Presidential Administration about every four to eight years policy tends to be transactional rather than strategic. Current leaders may go in one direction while future leaders might decide to go in a direction that is quite different. All we can do is to choose wisely and hope and pray that who we've chosen for our future leaders, represent our values.
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