The U.S. energy boom has caused crude oil prices to fall over the last month, but its effect on broader geopolitics — such as waylaying the Organization of Petroleum Exporting Countries — is expected to be far more muted over the long term.
Politicians in Washington have spoken of using their newfound energy supplies to throw their diplomatic weight around. But the impact of U.S. oil strength isn’t as extensive as some might imagine. OPEC will still be a major oil player for decades to come, and the U.S. will still be concerned about keeping prices stable during conflicts in the Middle East and elsewhere.
Brent crude prices Wednesday hit their lowest level since June 2012, just under $91 per barrel, partly a reaction to over-supply as the International Monetary Fund reported weak growth for virtually every country except the United States and the United Kingdom. An unanticipated production bump in Libya also has pushed prices down.
The U.S. has fueled much of that glut, largely from hydraulic fracturing, or fracking, in tight-rock formations such as shale. Adam Sieminski, who runs the federal Energy Information Administration, has boasted that global oil prices would be $150 per barrel without production bumps in North Dakota and Texas to offset disruptions in Egypt, Iran and Iraq. Advances in vehicle fuel efficiency and weaker economic performance in Europe and China also have tempered oil demand.
Saudi Arabia has surprised observers as well. The oil revenue-dependent nation, which is the world’s largest producer and exporter, has bucked historical trends by allowing prices to fall rather than cutting production to keep them high. The House of Saud appears content to let them drop to maintain its market share, experts say.
But policymakers in the U.S. shouldn’t be running victory laps, experts said.
For starters, current oil prices are well above historical averages. In inflation-adjusted terms, prices have been higher for a sustained period of time only twice — during the 1979 energy crisis resulting from the Iranian Revolution and during the global financial crisis in 2008.
And the impact on U.S. relations around the globe is more limited than one might expect.
“There is a lot of implications for U.S. geopolitics, but we shouldn’t overstate it,” Andrew Holland, senior fellow for energy and climate at the American Security Project, said in an email, noting the U.S. supplies just 10 percent of the global oil market.
“The recent increase may be more psychologically important than the percentages,” Holland wrote. “With greater production, policymakers ‘feel’ more secure, and so are more confident about taking action with oil powers (whether it’s sanctions on Iran, bombing Iraq or even standing up for Ukraine against Russia) than we would have been only five years ago when we weren’t producing all this oil.”
Indeed, surging domestic production has allowed the U.S. to push ahead with sanctions on Iran’s oil sector and restrictions on Western companies participating in joint energy projects in Russia, experts said. Without its own resources to plug global supply gaps, the Obama administration likely wouldn’t have the political stomach to initiate those policies.
The U.S. moves could prove damaging to both nations, which are heavily dependent on oil revenue. Russia derives half its budget from selling oil and natural gas to its neighbors, and taking away Western cooperation will make it harder for it to develop expensive Arctic resources. Sanctions that have crippled the economy in Iran have arguably brought it to the negotiating table on its nuclear program, though whether those negotiations end up fruitful remains to be seen.
U.S. oil supplies might give it more space to breathe in conflicts, but the nation won’t be completely free to disengage from them.
That’s especially true with the Middle East, said Neil Bhatiya, a policy associate with the Century Foundation. The U.S. might not be compelled to act as quickly, or forcefully, in future flare-ups compared with the recent past, but it still will need to keep a watchful eye on the region.
“We still as a matter of policy want as much stability as we can, especially with the [Persian] Gulf,” he told the Washington Examiner. “We want to make sure the market has enough elasticity in it so our allies … can purchase what they need at a price that is reasonable.”
The U.S. has no intention of using its oil supplies as a geopolitical stick —as Russian President Vladimir Putin does with his country’s natural gas — and it likely couldn’t anyway, considering most crude oil exports are banned and the U.S. brings in 40 percent of its oil from abroad.
But the idea that the U.S. can take away the role of “swing” producer, by altering prices by ramping production up or down, from Saudi Arabia is far-fetched.
While the U.S. has been a major factor in falling prices, the OPEC oil cartel will remain a potent force. Though OPEC members have struggled for years to live up to production expectations, Saudi Arabia’s expansive oil reserves — at 268 billion barrels, the EIA says it sits on 16 percent of the world’s proven reserves — and nationalized industry allow it to play kingmaker.
EIA forecasts a strong OPEC past 2020. Between 2010 and 2040, OPEC’s 12 member nations will account for 14.2 million barrels per day of new production capacity, 90 percent of which will come from its Middle East members. Non-OPEC nations will chip in an additional 10 million barrels per day, with the U.S. providing a bit more than 2 million barrels per day of that.
Still, the increased U.S. production is prompting Saudi Arabia to take unusual steps by testing the markets.
Seth Kleinman, the head of energy strategy at Citigroup, said Saudi Arabia appears willing to test whether prices can fall low enough to deter further investment in U.S. shale wells, which are costlier to drill than conventional wells. He estimated that $80 is the level where investment could be strained.
Frederick Lawrence, vice president of economics and international affairs with the Independent Petroleum Association of America, agreed that Saudi Arabia is looking to challenge that break-even price. But he said that demand from emerging economies is still “robust” and that export of petroleum products — such as gasoline — likely will remain strong.
“Their advantage is cost of production and our advantage is increased production with refining capacity,” he said in an email.
Sam Ori, executive vice president of energy security group Securing America’s Future Energy, said Saudi Arabia and other OPEC members are content to let the U.S. shoulder the production burden currently. But once U.S. shale plays start to dwindle, Ori predicted Saudi Arabia would invest in new wells to spur new production.
“When you come back to the fundamentals, it’s not accurate to say we’ve defeated OPEC,” Ori told the Examiner. “We’ve been through this two or three times already.”
