U.S. Shale and a New Balance of Power

 

A recently published New York Times article, aptly titled “New Balance of Power,” crystallizes the geopolitical significance of the American energy renaissance made possible by horizontal drilling and hydraulic fracturing. Over the course of a few short years, shale development has helped the United States achieve what few had thought was possible: Not only have we substantially reduced our dependence on foreign energy sources, but we have also gained the ability to influence the world price of oil – and shifting the global balance of power to our advantage in the process. As the New York Times puts it,

“The center of the oil world has spun from the sands of Saudi Arabia to the shale oil fields of Texas and North Dakota, a giant new oil patch some wildcatters have begun to call ‘Cowboyistan.’”

To demonstrate just how much America’s energy picture has changed, we contrast excerpts from recent news coverage with comments made by our nation’s lawmakers, industry experts, and academics not too long ago – before the shale boom changed everything.

U.S. as the Price Setter

In December, The Economist observed, “So the economics of oil have changed.” The magazine was referring to America’s newfound ability to influence the global price of oil, courtesy of its status as the world’s dominant oil and gas producer. As IHS Vice Chairman Daniel Yergin noted last October,

“Something had to give, and that something has proved to be the oil price. Its dramatic 20 per cent plunge reflects the reality of a new era in world oil, one defined by a resurgence of North American supply.”

THEN NOW
Al Gore:  “[T]he exploding demand for oil, especially in places like China, is overwhelming the rate of new discoveries by so much that oil prices are almost certain to continue upward over time no matter what the oil companies promise.” (July 2008) “[T]he growing U.S. oil supply has limited the power of the OPEC oil cartel and helped bring down oil prices globally.” (Harvard Business School and Boston Consulting Group, June 2015)
Director of Council on Foreign Relations Michael Levi: “The amount of oil you produce at home doesn’t affect the price.” (February 2002) Daniel Yergin, IHS Vice Chairman: “How low will prices go? The US holds the key.” (October 2014)
Michael Bromwich, Director of Bureau of Ocean Energy Management, Regulation and Enforcement: “You can’t drill your way to lower oil prices. It’s a world market. We have a very limited impact on that.”(Platts, April 2011) “The expansion of U.S. oil supply to more than 9 million barrels a day is contributing to a global glut, driving down prices by as much as 32 percent since June.” (Bloomberg, November 2014)

 

President Obama: “You know we can’t just drill our way to lower gas prices.” (February 23, 2012) “For the past couple of years, the global oil markets have been buoyed by a glut of crude oil coming out of the U.S.” (Wall Street Journal, October 2014)
Former Senator John Kerry: “The fact is, the price of oil will not drop. The price of energy will not drop. The price of gasoline will not drop. … [N]othing the United States does is going to accelerate our production of oil sufficiently to have an impact.” (March 2005) “In the past nine months, the flood of new oil supply [American oil producers] created has caused a collapse in the price of crude, which has dropped from more than $100 per barrel last June to less than $50 in January.” (Financial Times, April 2015)
Lou Crandall, chief economist of Wrightson ICAP: “Higher oil prices today are a global phenomenon, and the additional supply from increased drilling by the U.S. would not alter the global balance of supply and demand greatly. Gasoline prices at the pump would be higher either way.” (March 2011) “Why are prices dropping? Put simply, global oil supplies are exceeding demand and driving down prices in the process. A major factor has been the explosion in U.S. oil production, which is up to almost 9 million barrels per day and expected to hit the highest levels in four decades next year.” (Fortune, December 2014)
Phyllis Martin, an analyst with the U.S. Energy Information Administration: “…[I]ncreasing the oil production in the U.S. is not going to make much of a difference in world markets and world prices … It just gets lost. It’s not that much.” (May 2011) “Benchmark oil prices in New York have dropped more than 20 percent this year as crude production in the U.S. reached the highest in 40 years, driven by shale fields in North Dakota and Texas.” (Bloomberg, November 2014)
Tom O’Donnell, professor of Graduate International Affairs at The New School: “The amount of extra oil that the U.S. would produce, as far as affecting the world price of oil, is almost insignificant. People who say producing more oil will bring price down for Americans are missing the fact that it’s a world market.” (March 2011) “Oil prices plunged into a bear market last month, the result of a surge in shale drilling that lifted U.S. output to a three-decade high…” (Bloomberg, November 2014)

 

Former Chief Scientist at BP and former Under Secretary for Science Steve Koonin: “The U.S. is a small producer without much flexibility in a much bigger and rapidly growing global market. There is no way that we can ramp up any sort of production enough, and fast enough, to materially swing the global market … And moreover, the cartel, OPEC, has its hand on the tap and can restore the price.” (Politico, February 2012) Tarun Dang, managing partner with Trend-Wise Capital Management: “While decline in demand was the key driver for the 2008 crash, the sharp drop in prices this time around is being caused by a supply glut. Continued growth in the U.S. shale production and increase in non-OPEC countries oil exports have led to excess capacity.” (October 2014)

 

Paul Bledsoe, Bipartisan Policy Center scholar: “Obviously the price of oil is set on a global market. … The notion that somehow we can produce so much domestically that we will move the global price is incorrect.” (February 2012) “As soon as railroads connected North Dakota’s Bakken shale field to East Coast refineries the last couple of years, imports from the Middle East and Africa dried up, forcing various OPEC producers to redirect their product to China and other Asian markets. There, they battled it out for market share by slashing prices. That is just one example of how shale drilling not only transformed the United States from dependent consumer to a robust producer, but is also transforming the price dynamics of the global market.” (New York Times, April 2015)
Former Representative Bob Inglis (R-SC): “Oil is being sold in world markets that are bigger than us. But if you are a consuming state, it will be a bitter realization that oil is going overseas and my price at the pump is not coming down.” (August 2014) “The descendants of the 1930s wildcatters are today’s producers of oil from shale, who are driving down the world price of crude by flooding the market with millions of barrels of new oil each day.” (Bloomberg, December 2014)

 

U.S. Production

Until recently, it was commonly understood and oft-trumpeted by politicians that U.S. reserves of oil – and our ability to extract it – were exceedingly limited. The sheer power of American innovation and ingenuity, however, has led to a remarkable energy resurgence – so much so that we are now the top producer of oil and natural gas in the world.

THEN NOW
President Obama: “But the challenge is we’ve only got about 2 to 3 percent of the world’s oil reserves and we use 25 percent of the world’s oil. So we can’t just drill our way out of the problem.” (March 2011) “United States production now represents roughly 10 percent of global production.” (New York Times, April 2015)

 

Former Representatives Roscoe Barlett (R-MD), Virgil Goode Jr. (R-VA), Bob Inglis (R-SC), Randy Kuhl (R-NY), et al.: “…a growing number of petroleum experts believe that the peak in the world’s oil production (Peak Oil) is likely to occur in the next decade while demand continues to rise … North American natural gas production has also peaked.” (October 2005) “There is a strong chance, energy experts say, that this could be the beginning of decades of United States dominance in the oil markets, and that dominance will be accompanied by relatively inexpensive energy. The shale fields around the country are plentiful, and there is much more to be drilled.” (New York Times, April 2015)

 

President Obama: “So what does this mean for us? It means that anybody who tells you that we can drill our way out of this problem doesn’t know what they’re talking about, or just isn’t tell you the truth.” (February 2012) Edward Morse, Citigroup’s head of global commodity research: “The key issue is not whether production grows, it’s by how much.” (Business Insider, July 2014)

 

Senator Ron Wyden (D-OR): “Where is that oil going to come from to meet the increased demand for gasoline…? It is not going to come from the United States. Our Nation only has 3 percent of the known oil reserves in the world.” (October 2002) “U.S. oil production has increased by about 80% over the past six years, from 5 million barrels per day in 2008 to 9 million per day this year. The U.S. energy resurgence is riding a shale boom in states such as North Dakota, Ohio, Pennsylvania and others where oil companies use the technique known as “fracking” to extract oil from shale rock formations deep beneath the earth’s surface. With that boom, the U.S. is contributing more oil to the global supply, resulting in a glut as demand has failed to keep up with production.” (Fortune, December 2014)
Former Senator Olympia Snowe (R-ME): “Our nation cannot rely on domestic oil production as the keystone of an energy policy, given that the United States consumes 25 percent of the world’s oil supply but produces just 3 percent of the world’s oil supply.” (March 2003) U.S. Energy Information Administration: “U.S. remained the world’s largest producer of petroleum and natural gas hydrocarbons in 2014.” (April 2015)
Senator Dick Durbin (D-IL): “This White House argues that all we can do to get out of a problem is to drill our way out. Except the obvious, America has only 3 percent of the known oil reserves in the world, and we consume 25 percent. We cannot drill our way out of this problem.” (November 2005) “That remarkable change has been building since 2008, as American shale fields accounted for roughly half of the world’s oil production growth while American petroleum output nearly doubled.” (New York Times, April 2015)

 

Then-Senator John Kerry (D-MA): “In reality, international demand for oil is going up, and prices are going up as that demand goes up … We cannot drill our way out of this problem under any scenario whatever. Whether we drill in Alaska or even the oil in the deep water of the gulf, we cannot drill our way out of it.” (April 2005) “Put another way, the United States is overtaking the Organization of the Petroleum Exporting Countries as the vital global swing producer that determines prices.” (New York Times, April 2015)

 

Senator Bill Nelson (D-FL): “The United States has 3 percent of the world’s oil reserves, but the United States consumes 25 percent of the world’s oil production. It doesn’t take a mathematical genius to figure out that you can’t drill your way out of the problem.” (April 2007) Daniel Yergin, IHS Vice Chairman: “The US is going to give Saudi Arabia and Russia a run for their money in terms of being the world’s number-one oil producer.” (Financial Times, April 2015)
Representative Lois Capps (D-CA): “With 3 percent of the world’s resources, 25 percent of the world’s demands, shouldn’t it be obvious that we can’t drill our way out of this problem?” (May 2007) “’Why doesn’t Saudi Arabia think that couldn’t work again today?’ [Former Ecuadorean oil minister and former secretary general of Organization of the Petroleum Exporting Countries (OPEC)] Mr. Ortiz asked. ‘Because of the soaring U.S. production. Today’s OPEC is thinking about market fundamentals rather than manipulating the market because it doesn’t have the same power it once had.’” (New York Times, April 2015)

U.S. Energy Independence

Just a decade ago, American dependence on foreign energy sources appeared to be a foregone conclusion and the notion of “U.S. energy independence” seemed all but a lofty aspiration. Yet, thanks in large part to horizontal drilling and hydraulic fracturing, we’ve seen dramatic increases in American oil and gas production that have substantially reduced our dependence on foreign oil and insulated our economy from global supply disruptions.  U.S. oil imports are now 27% – the lowest annual average since 1985. In fact, the Energy Information Administration (EIA) anticipates energy imports and exports coming into balance for the first time since the 1950s within 15 years.

THEN NOW
House Democratic Leader Nancy Pelosi: “We cannot drill our way to energy independence.” (May 2006) “Along with similar oil-producing areas in Texas, [the Bakken formation in North Dakota] has transformed the outlook for US energy security, created hundreds of thousands of high-paying jobs and rattled the leaders of rival oil-producing countries from Riyadh to Caracas.” (Financial Times, April 2015)
Then-Senator Barack Obama (D-IL): “For too many years, America has been overly dependent on foreign oil to meet its domestic energy needs. And, despite rising crude oil prices and unsettling volatility in the Persian Gulf, that trend is increasing, not declining.” (March 2005) U.S. Energy Information Administration: “Our dependence on foreign petroleum has declined since peaking in 2005.” (May 2013)
Former Representative Roscoe Bartlett (R-MD): “Oil production in the U.S. peaked in 1970 and has declined every year since then … Energy experts agree that America can never produce enough oil domestically to meet our current or future demand.” (June 2005) U.S. Energy Information Administration: “U.S. oil production growth in 2014 was largest in more than 100 years. … On a percentage basis, output in 2014 increased by 16.2%, the highest growth rate since 1940.” (March 2015)
Then-Senator John Kerry (D-MA): “The fact is, we are more dependent on foreign oil today than ever before. Despite the sharp rhetoric of the 1970s and the initial effort to try to be less dependent on oil. It has consistently increased. This dependence slows our economy, harms our environment, dilutes our national security, and it burdens Americans with the high gas prices they face today.” (April 2005) “The nation’s new ability to influence supplies and prices could only have been a dream in the Nixon and Carter days. Ample United States supplies in recent years protected the American economy while the Middle East and North Africa have been in turmoil, and it enabled Washington to spearhead sanctions on Iran without causing a price increase.” (New York Times, April 2015)
Mike Lynch, Strategic Energy and Economic Research, Inc.: “You might, under really optimistic scenarios, over five or six years, add 2 million barrels a day of production … On a global scale, it’s significant. But we would still be big importers — we would still be dependent on foreign oil.” (May 2011) “Thanks to the hustle of innovative U.S. energy companies, the discovery of vast shale gas and oil fields, and stronger national conservation, some forecasts peg energy independence for North America at just a few years off. A Citigroup report calls the region ‘the new Middle East.t Pimco says the trend is a ‘game changer.’ Bain & Co. declares it a ‘new paradigm.’” (Wall Street Journal, September 2012)

 

Former Senator Byron Dorgan (D-ND): “The American economy is and will be held hostage by our ability to find and import oil from outside of our country’s borders. … If we wake up tomorrow morning, God forbid, and terrorists have interrupted the supply of oil to this country—and yes, that could happen—this country’s economy will be flat on its back. It will be flat on its back because we rely on oil from sources outside this country, much of it from very troubled parts of the world. And our dependence is only expected to increase.” (March 2005) Edward Morse, Citigroup’s head of global commodity research: “While this country will still be importing plenty of medium and heavy crudes, most of the imports will come from Canada and Mexico … So the U.S. will no longer have to worry about disruptions in supply that might disrupt economic activity. That’s why we call it the era of North American energy independence.” (Barron’s, March 2014)

 

Former Representative Lynn Woolsey (D-CA): “Of the 21 million barrels consumed by the United States each day, 14 million barrels are imported, making Middle East oil the United States’ main source of energy.” (April 2005) “The demise of OPEC as the price manipulator is what virtually every American president since Richard Nixon had in mind when they promised to find a way to make the United States energy independent, not chained to Middle East or OPEC oil, after the oil embargoes of the 1960s and 1970s.” (New York Times, April 2015)

The U.S. shale revolution has taken us from fears of scarcity to an age of abundance – from a reliance on foreign oil to an energy independence more tangible than ever before. The dynamism and innovation that have characterized the industry since the days of the wildcatters have, over the course of a few years, transformed the existing geopolitical landscape, and, indeed, the global balance of power. The Economist, covering the American shale renaissance, wrote:

“That energy revolution is the envy of the business world. Abundant oil and gas have been extracted from underground rocks by blasting them with a mixture of water, chemicals and sand—‘fracking’, in the jargon. As well as festive spirit, the firms responsible embody an all-American formula of maverick engineers, bold entrepreneurs and risk-hungry capital markets that no country can match.”

That’s something we can all celebrate.

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