Oils Well for American Energy Independence

A pressing question lies in determining what effects considerable cuts in the price of oil, the glut in oil supplies, and the remarkable growth of the U.S. oil industry, has and will have on international politics as well as on the global economy.  Almost certainly, the United States and Western countries will benefit both politically and economically, while most of the members of OPEC, and countries including Russia, Iran, and the Islamic State of Iraq, and Syria, will be hurt. More broadly, there will be a global economic benefit as lower energy costs will help both producers and consumers.

It has come as an unexpected surprise that the price of crude oil, $85 in November 2014, is far lower than it was a few weeks ago. Uncertainty over the future price will probably be ended by decisions of the 12-member OPEC meeting in Vienna on November 27, 2014 on the levels of production and price. OPEC controls about 40% of global oil output. It faces a dilemma. Cuts in oil production will lead to price increases that would help some of the OPEC countries, Venezuela, Angola, and Iran. Cuts in oil prices is likely to reduce output from non-OPEC countries that are unable to be competitive. They would make American shale production in North Dakota and in Texas unprofitable.

At the core of the issue is the decision of Saudi Arabia to increase its output of oil to 9.65 million barrels a day while the price is declining. The Arab Gulf region still has the largest concentration of oil and gas fields in the world. Those countries account for about one-third of global oil production and 17 per cent of gas output. Saudi Arabia has long been the commanding power in this respect, and with its vast resources is not tied to a particular price target. Saudi Arabia can benefit from a lower oil price which could stop or delay production in other countries or their attempts to develop new sources of energy.

The United States, and its national security, has been linked to Saudi Arabia since the meeting on the USS Quincy in February 1945 between President Franklin D. Roosevelt and Abd al-Aziz Ibn Saud, the man who would become King of Saudi Arabia. The Saudis at first promised to supply cheap oil in return for U.S. protection of its security. That, together with other events and political instability in the region, has meant American presence, including maintaining a military presence at considerable cost in the area.

Since the days of the Greeks, we know that you cannot step into the same river twice. The relation between the U.S. and Saudi Arabia is changing to the benefit of the U.S. One factor affecting this is the rapid decline in oil reserves in the Gulf areas of production: currently it is about 48 per cent of world reserves, compared with 64 per cent thirty years ago. More immediately important is that the political threat to the West of sanctions imposed by Arab states as was done after the Yom Kippur war of 1973 is now not a viable option for at least two reasons. One is the oil glut, the increase of oil supplies available from the U.S., from Central Asia, Libya, Russia, Israel, and other countries. There are now more than 1600 oil rigs in the U.S., where production has grown by 15 per cent in 2013. U.S. production of crude oil increased from 5.7 million barrels a day in 2011 to 8.4 million in November 2014.

A second, related, factor is the increase due to extraordinary technological developments, particularly in the U.S., in horizontal, deep water, and shale gas drilling, and in hydraulic fracturing. Most important is the decline in demand for oil as a result both of a decline in global economic growth, especially in Europe and in China, the policy of environmental concerns, and conservation, accompanied by greater energy efficiency, especially in new cars.

In addition, a decline in oil price has great economic benefits. It is likely to boost consumer growth, as it did in the 1990s, during an earlier price reduction, and reduce inflation because of more business and consumer spending, and reduce the cost of food. Farmers, especially those producing ethanol, and U.S. airlines, which spent $51 billion on fuel in 2013, will benefit from the price cut.

Only the paranoid can believe that the U.S. and Saudi Arabia are engaged in a conspiracy to lower the price of oil, yet both countries can benefit from it both economically and politically, especially regarding relations with Iran and Russia. Saudi Arabia has two reasons for selling crude oil at below prevailing market price, though it needs a $90 barrel price for its economy. It hopes to discourage production of shale oil in the world, but more particularly aims to hurt the economy of Iran, its most feared religious rival, Shia not Sunni.

U.S. national security no longer depends on the availability of Arab oil. American policy on Middle East issues should change accordingly, paying less attention to the views of the Arab lobby on those issues and being more actively responsive to the Islamist threat of terrorism.

Here comes that rainy day for Iran. Estimates suggests that Iran needs at least $140 a barrel to balance its budget. The Obama administration and other democratic countries should take the opportunity to pressure Iran to give up its nuclear ambitions and intentions to make a nuclear weapon, rather than make concessions to it.

It is an open question whether the price cut will change Putin’s foreign policy especially towards Ukraine. Russia has had at least fifteen years of high oil prices, and has not used the consequent revenue for sufficiently advancing the economy in an adequate way. It now is obliged to deal with both the problem of sanctions against it as well as the price cut.

Russia is the world’s third largest producer. Oil and gas account for 70 per cent of its exports and more than half of its budget revenue.  It needs a price of $100-$150 a barrel to balance its budget. Already, the price cut has meant a fall in the value of the ruble, which has been supported by the Russian Central Bank, and a rise in inflation. Two possibilities arise. Popular discontent may cause political problems for the regime, or, Putin’ may adopt a more conciliatory policy towards the West.

However, neither is likely. At present Putin is playing pipeline politics. Germany is still Russia's largest single oil customer, and the whole EU is important for the Russian economy. But Putin is skillfully cultivating China, the second largest importer of oil. Earlier in May 2014 an agreement worth about $400 billion was signed. On November 9, 2014 a second ambitious long-term agreement was signed for Russia’s OAO Gasprom to supply 30 billion cubic meters of gas every year for the immediate future, through a pipeline from western Siberia to China.

The U.S., paradoxically is all at once the world’s largest producer, consumer, and importer of oil, and will benefit from the price cut, in spite of the issue of shale production that is relatively more expensive in price. The Obama administration should seize this moment when the country is able to free itself of Arab pressures, and is not dependent on the availability of Arab oil. President Obama has told us he has a pen and a phone. He can now use the pen to sign a Declaration of Energy Independence.