Relentless news coverage of oil prices has obscured a bigger story. We’re witnessing the emergence of a new oil era in which America becomes a player in global petroleum geopolitics. And none too soon.
“The world uses 4 million barrels of oil every hour of every day; people and goods cover 10 trillion ground-miles and 3 trillion passenger-air-miles annually. Add this fact: Global travel will double in coming decades.”
Iran has been moving at a furious pace since sanctions lifted to use oil to re-entangle its economy with the world. Re-imposing sanctions, regardless of provocations, will be more difficult.
Iranian negotiators are creatively using barter-type deals bundling oil supplies with investments into foreign refineries in nations from Brazil to India. And Iran just consummated a 10-year $600 billion oil agreement with China. Oil wealth, unfrozen when sanctions ended, is also being deployed with a $25 billion purchase of 118 aircraft from Airbus — a fleet that will consume some $20 billion of oil over its operating life.
The geopolitical significance of all this is obvious. And it extends far beyond Iran.
Oil is weaponized through the “gray” warfare of influence, intimidation and entanglements.Russia recently signed $30 billion worth of oil and gas deals with China, and plans to invest $18 billion in Venezuela’s oil fields, having sold them $3 billion in arms in recent years. ISIS has a sophisticated operation around captured oil fields, generating $600 million annually. Israel, historically devoid of resources in the oil-soaked Middle East, is calculating the strategic impact of newly confirmed massive shale oil resources in the Golan Heights. A list like this could fill pages.
Geopolitical tensions pivot around oil because it is critical. Two-thirds of global GDP is involved intrade, and oil fuels 95% of the transport of all goods and people. This reality has generated a preoccupation with finding petroleum alternatives. But despite vigorous exhortations for “moonshots” and hundreds of billions of dollars spent on subsidies, there are no alternatives to oil at the price and scale the world needs.
The wind-energy equivalent of a barrel of oil costs three times as much to produce, to say nothing of the 20,000 pounds of Tesla-type batteries needed to store a single barrel’s worth of electricity. Batteries twice as good — not on any road map — don’t move the meter. As for biofuels, with 40% of America’s corn harvest used to distill ethanol, farmers still supply under 5% of domestic, never mind global, transportation.
And here’s the big picture: The world uses 4 million barrels of oil every hour of every day; people and goods cover 10 trillion ground-miles and 3 trillion passenger-air-miles annually. Add this fact: Global travel will double in coming decades.
Until recently the go-to sources for meeting growing demand were monarchies and oligarchies dominated by the OPEC nations and Russia. But America has upset the apple cart with the unexpected emergence of a shale industry that produced three-fourths of all new global oil supply in the past half-dozen years. This triggered a war for market share and the price collapse. Oligarchs and kleptocrats, scrambling to adjust, have been deprived of trillions of dollars. A new third era of petroleum geopolitics has arrived.
A century ago in the first oil era, the United States was the world’s uncontested petroleum powerhouse and dominant exporter: A small number of private firms then produced half of world oil. In 1939, for instance, the U.S. supplied 80% of Japan’s oil.
That first era ended with the 1973 Arab oil embargo. In the second era, America became increasingly import-dependent, its geopolitical petroleum power neutered. For good reason, U.S. policy was fixated on achieving “energy independence” through conservation and the pursuit of petroleum alternatives.
Now American shale technology has triggered a third oil era. This first significant solution for oil dependency was invented and deployed by thousands of American businesses backed by a multitude of financial firms in the world’s biggest and most-liquid capital market. It’s all quite disturbing to petroleum potentates accustomed to collaborating with or influencing a small club of mega-companies, most of them owned by nation-states.
Of course low prices are causing pain and restructuring in America’s shale ecosystem. But in geopolitics one thinks strategically. You can bet they are in Moscow and Tehran. Here’s what they know: The geophysical resources of U.S. shale are Saudi-scale. Shale technology keeps getting better. And hundreds of billions of dollars of private capital are poised to scoop up distressed assets in what “vultures” see as the buying opportunity of a generation. We’re one modest price-bump away from unleashing a shale 2.0 boom.
All this is game-changing, but still not incorporated into America’s geopolitical posture. Policymakers need to shed the old subservient mindset. At the end of 2015, Congress lifted the ban on crude exports, a seminal event. But more reform is needed to facilitate private investment in export infrastructure and to accelerate the deployment of radically better shale technologies that can drive production costs even lower. And where are the trade missions with our oil-dependent allies that focus on the radical opportunity to buy crude from America? All would enhance our competitive edge.
The shale-induced oil price collapse has been called the biggest wealth transfer in modern history. But given the proximate reason for that collapse, what we are witnessing is the biggest transfer in geopolitical power since the fall of the Berlin Wall.
America now has a generational opportunity. We can ensure the global wealth transfer is permanent while restoring vital “soft” power to America’s arsenal as an alternative to the costs and risks of over-dependence on “hard” power.
This piece originally appeared in Investor's Business Daily
This piece originally appeared in Investor's Business Daily