A new report from researchers at Rice University’s Baker Institute for Public Policy finds that the United States’ exposure to geopolitical risks that could disrupt oil supply is at its lowest point since the early 1970s. Titled “Geopolitical dimensions of US oil security,” the report credits many factors for strengthening the stability of the American oil supply – not the least of which is the effect of the U.S. shale revolution.
With technological advances in oil production such as hydraulic fracturing and horizontal drilling increasing domestic oil production to near record levels, the United States has not only decreased its reliance on oil from more volatile Middle Eastern countries, but also has a greater diversity of potential suppliers, as well as new resource opportunities thanks to shale development.
Prior to the proliferation of fracking for shale development in the late 2000s, U.S. oil production dropped from an annual peak of over 9.6 million barrels per day (b/d) in 1970 to an average of just under 5 million b/d in 2008. Around this same time, U.S. imports of oil reached an all-time high, averaging nearly 3.6 million b/d in 2008 – almost 2 million b/d of which came from OPEC countries such as Saudi Arabia. Since then, U.S. production has increased to more than 9.6 million b/d, with shale development accounting for roughly 6.4 million b/d of production, while U.S. crude imports declined by over 700,000 b/d from 2008 to 2016.
This growth in U.S. production has not been insignificant, the authors note, as shale development has opened greater supply opportunities domestically and increased global supply stability:
“As recently as the early 2000s most US oil flowed from Alaska and the Gulf of Mexico. But, today tight oil production has spread into Texas, New Mexico, Oklahoma, North Dakota, Colorado, and Pennsylvania. In fact, oil output from shale drove a significant policy shift in the US: the lifting of the decades-old oil export ban.”
The authors elaborate on the importance of U.S. production growth through shale development, as an increased role as a global supplier would further insulate the global oil market from geopolitical volatility:
“The energy security implications are even more pronounced when one considers the relative political stability of the US as a significant supplier of oil to the global market. The increase in supply from a region with a large measure of political and economic stability enhances the stability of the market overall.”
The process of shale development itself aids in improving oil supply stability as well. As the authors mention, characteristics of the shale development process could hinder attempts to interfere with oil production in more volatile countries. According to the report:
“Shale’s unique characteristics – small-scale, short-cycle investments – may also reduce opportunities for political interference, particularly in places where ‘above-ground’ issue hinder otherwise viable production. …Given the continuous investment and drilling required to maintain output, much less grow it, shale developments do not lend themselves to expropriation in the same way that conventional oil is vulnerable to the ‘obsolescing bargain’ of concession agreement that get abrogated once infrastructure is built and large fixed costs are sunk. Were a government to seize a shale operation, the steep decline in rates typical of shale wells would mean that production would drop precipitously. In this way, shale resources pose a less viable target for nationalization than what has been witness in the past.”
Diversification, and More Innovation
In addition to soaring domestic production, the diversification of sources in the global oil market also helps shield the United States from geopolitical risks. According to the report, the Organization of Petroleum Exporting Countries (OPEC) once accounted for “more than half” of the world’s oil supply, but this share has declined to roughly 42 percent today. Further, the study notes that where there were 16 countries producing more than 500,000 b/d in the 1970s, that number has since increased to 28 today. This production growth has limited the reliance on Middle Eastern oil, whose supply is more likely to be disrupted due to conflict, as well as started to shift the supplier-importer dynamic. As the report mentions, a greater number of suppliers means a weakened ability use oil as a political cudgel, with policy shaping tools beginning to favor importers instead:
“A proliferation of producers also inhibits the ability of OPEC or any other combination of suppliers to use production cuts for geopolitical ends, as was the case in the 1973 embargo. In the current environment, oil importers can deploy market-oriented tools to influence foreign policy, for instance, by restricting exports from countries where behavior runs afoul of international norms, as has been seen recently with international sanctions on Iran.”
Finally, the authors point to technological advances such as electric vehicles and improved fuel efficiency in transportation as further improving U.S. oil security. By lessening demand, thes innovations mitigate additional reliance on foreign sources to meet oil needs. That said, the researchers stress that oil will continue to play a significant role in U.S. and global energy needs, with 88 percent of global transport predicted to remain based on liquid petroleum-based fuels in 2040 – barring putative government intervention. According to the report:
“In transportation, oil has few substitutes. Only electric vehicles, natural gas and biofuels offer a reasonable replacement, but these suffer from shortcomings related to energy density, cost per mile, range, and even carbon content. As such, a working thesis herein is that oil is unlikely to lose its primacy in transportation without concerted government policies that impose heavy penalties on emissions or favor alternatives.”
With the United States now flush with oil thanks to innovation in shale development, it’s easy to forget that the outlook on U.S. oil security was much different just a decade ago. As this report shows, shale development has not only improved the stability of oil supply domestically, but also globally, as it has unlocked new resources for production as well as decentralized power in the global oil market away from more volatile countries.