Oil Independence

Last week the United States passed a milestone that is almost unimaginable for those of us who have lived through the “oil crises” of the past.  For the first time in 75 years, America ended its dependence on foreign oil and became a net oil exporter.

shutterstock_360583700-0The transition of America to a state of energy independence has largely occurred because of the huge surge in production of oil and natural gas from shale formations that have been found throughout the country, in Texas, and North Dakota, and Pennsylvania, and even here in Ohio.  Last week there was a sharp drop in imports and a sharp increase in exports that nudged the U.S. into energy independence territory.  And while the production of oil will vary, the amount of oil-producing shale formations will likely keep America in positive net production territory for some time.

What does America’s status as a net oil exporter mean?  The oil boom has obviously produced a lot of new wealth and jobs in the U.S., but more broadly it means that the role of OPEC as a major world player, capable of affecting the economies of oil-using countries with a few pricing decisions — or even worse, embargoes — has been greatly diminished.  In fact, the production from the United States has effectively flipped the power equation, because many of our producing wells are profitable at oil prices as low as $30 a barrel, which is a lower price than is profitable for many OPEC countries.

The American oil boom thus presents OPEC with a serious challenge:  if it tries to enforce higher prices, buyers will turn to American oil and OPEC countries will lose market share — but because Saudi Arabia and other OPEC countries need higher prices to be profitable, OPEC can’t afford to let profits fall.  Last week in Vienna, OPEC and Russia announced an agreement to cut production in order to keep prices up.  It remains to be seen whether that agreement will work, given American production, or whether OPEC members will begin trying to recapture market share by selling at lower prices than OPEC is trying to enforce.  In fact, there are signs that the oil cartel is fraying around the edges.  Last week, for example, Qatar announced that it is leaving OPEC.

Imagine:  an American foreign policy that no longer needs to focus obsessively on the Middle East in order to ensure that the oil spigot remains turned on.  That’s just one of the interesting consequences of our surging domestic production.

 

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The Oil Story

Recently I ran across an interesting article on developments in the oil-producing world.  Provocatively headlined “The Collapse of the Old Oil Order,” it addresses the dissension within the Organization of Petroleum Exporting Countries (OPEC) and the economic forces that are affecting the price of oil and keeping it below $50 a barrel.

Much of the article addresses geopolitical forces — like Saudi Arabia’s very rocky relations with Iran and Russia, two other big petroleum producers, and changes within the Saudi regime itself to move the Kingdom’s economy away from near-total reliance on oil prices and its seemingly endless supply of crude — but the piece also gets into the basics of global supply and demand.  And those familiar elements from Economics 101 have changed in ways that the experts didn’t really predict, especially on the supply side.

With the discovery of massive supplies of shale oil and gas in the United States and the development of technology to extract it, for example, there’s lots of new supply in the marketplace, and no one is making the predictions that we’re going to run out of oil in the foreseeable future that we used to hear.  In addition, green initiatives and other forces have affected the demand for oil in developed countries, and the consumption of oil in developing countries hasn’t bridged the gap.  The result is an oversupply, with countries whose oil production costs are highest struggling to deal with the current economic reality.

Gas prices aren’t exactly cheap — in Columbus and nationally, they’ve actually increased recently — but they are far from their peak prices of $4.00 a gallon or more years ago.  And the days when mighty OPEC was unified and could singlehandedly send shock waves through the global economy seem to be behind us.  It’s a good example of how predicting the future based on the uninterrupted continuation of current trends can often be wrong.