New Report: Expanding America’s Petroleum Power In the Third Oil Era
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As the year 2016 began, the first unrestricted exports of domestic crude oil left American ports for the first time in 40 years. The year also began with near-record low prices for crude, triggering financial stress for thousands of American shale businesses, most small and midsize. Oil prices have collapsed from a combination of factors: market manipulations from OPEC; slower worldwide growth; and the success of America’s shale technology, which created a global oil glut.
These same shale businesses played a major role in keeping America from sliding back into a recession after the 2008 collapse, generating millions of jobs and cumulatively adding a trillion dollars to the economy. At risk now are not just the future economic benefits from the new American shale industry but the substantial geopolitical benefits that would accrue should the U.S. become a major player in world oil markets, a possibility heretofore inconceivable.
To assert—as many do—that oil’s importance is waning, or should wane, is misguided. Oil enables global commerce at unprecedented levels as well as the personal mobility that propels social and economic freedoms. Compared with four decades ago, the number of cars in use worldwide has risen threefold, aviation miles sevenfold, and maritime shipments threefold; oil fuels 95 percent of all that transportation. The digital economy, a new force accelerating information exchange and commerce, will only enhance the role of oil in the exchange of goods and people in coming decades.
But the majority of world petroleum trade remains dominated by nation-state companies, often directed by authoritarian regimes that wield energy riches as weapons of influence or intimidation. There has never been a more opportune time for America to capture the geopolitical “soft power” benefits from greater oil production and exports.
Oil markets are cyclical: today’s low prices will inevitably rebound, just as prices always fall when peaks occur. And when oil prices rise, Saudi Arabia, Russia, and Iran will still be major market players. Yet this time, there is a wild card: a cumulative $1 trillion invested by American firms and financiers in shale technology, infrastructure, and assets. In the near term, we will continue to see “creative destruction” as many assets consolidate under stronger players, but a shale 2.0 resurgence will then follow. We’ve seen this kind of cycle before: in the late 1990s, the tech investment bubble ended in a bust; it was followed by a second Internet boom, which is still under way.
If, in the next decade, the U.S. were to replicate the shale production growth of this past decade, the nation would reap not only a second shale boom but also a tectonic shift in the geopolitical status quo. How can America expand its petroleum power in a new Third Oil Era, especially in the face of fierce global price manipulation and competition? Congress should pursue four steps to help American oil firms compete in a low-cost environment that would also benefit consumers with sustained low prices and, not least, also expand U.S. geopolitical petroleum power.
1. Cut red tape. Reverse existing overregulation, freeze—and review—new intrusive regulation, and facilitate expansion of oil-related infrastructure.
2. Cut corporate taxes. Lower U.S. corporate tax rates to (at least) the OECD average and reform America’s anticompetitive “repatriation” tax, which leaves hundreds of billions of dollars stranded offshore—money that could be invested in America.
3. Drill more on federal lands. Expand private-sector access to federal lands, instead of further restricting it. Increasing access to “sweet spots” would benefit the economy and add royalties to the Treasury.
4. Repurpose the Strategic Petroleum Reserve. Sell a share of the excess oil in the SPR—a surplus created by new shale production—to fund basic research in shale science and to fund new public-private partnerships that can test next-generation shale technologies.
Proposals to foster more and better hydrocarbon technology inevitably encounter the claim by anti-oil activists that such actions constitute “favors” for “Big Oil.” That tired phrase traces its roots to the First Oil Era, when seven private companies accounted for 50 percent of global oil production. Those days are long gone. In America, thousands of small and midsize firms, often with only dozens of employees, produce 75 percent of U.S. oil and gas output. Only eight privately held firms, of which just three are American, rank among the world’s 30 largest oil companies.
Big Oil exists in the form of roughly two dozen nation-state oil companies that control more than 70 percent of global oil reserves. From Saudi Aramco (Saudi Arabia) and NIOC (Iran) to Gazprom (Russia) and PetroChina (China), such firms are overseen by authoritarian governments and control access to far more oil—ten to 100 times more—than even the largest private oil firms, American and non-American alike. America’s shale entrepreneurs and businesses are, in reality, competing against foreign Big Oil.
Global oil demand will inexorably grow. Oil prices will inevitably rise, too, as slowing investment limits new supply. Congress should help ensure that global oil monopolists do not have free rein to fill the supply gap.
Mark Mills is a senior fellow at the Manhattan Institute. You can follow him on Twitter here.
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