America may no longer rely on Middle Eastern oil, but it still needs stable markets
Washington’s goal of achieving energy independence seems to be in reach. After decades of declining oil and gas production since the end of the Second World War, America’s shale revolution has triggered explosive growth, with latest figures indicating that production levels finally surpassed demand in the fourth quarter of this year.
Washington has duly taken credit for this astonishing development, and President Donald Trump in particular has argued that this newfound autonomy underpins a strategic withdrawal from the Middle East, as witnessed in Syria, Afghanistan and Iraq.
However, the drone attacks against Saudi Aramco’s oil facilities in September were a reminder that the United States and in fact the global economy are not immune to risks affecting oil supplies.
Global volatility is still ruling the market, influencing not only oil and gas prices, but also the energy trade flows around the world. For decades US presidents including Barack Obama and now Trump have targeted the holy grail of energy independence. But the jury is still out on the strategic impact of the development.
Washington’s underlying rationale for seeking energy independence would be to reduce US dependency on the supply of such an essential feedstock as oil. Increased local production, supported mainly by shale oil and gas, has lowered US import needs while net exports are reality.
At present, US shale and conventional production have increased dramatically, putting pressure on global oil markets and OPEC, and removing some of the country’s oil and gas imports. As reported by the US Energy Information Agency (EIA), the United States produced in 2018 around 17.7 million barrels per day of crude oil, while domestic consumption hit 20.5 million. This equilibrium could however be short-lived.
The effects of global oil and gas investments, OPEC production agreements, US sanctions on Iran, and local economic factors, could all change the balance again dramatically. Overall net exports figures are hiding the fact that the real driver behind the net exporter position is that the US produces too much light shale oil for local consumption. Import of other qualities or products are still needed. US producers around the Gulf of Mexico and in southern states see it is more commercially attractive to export their own petroleum than to transport it to other markets in the US.
The US shale sector is capital intensive and suffers from heavy decline rates and the sector is heavily indebted. At the same time, US companies continue to buy high volumes of oil from Canada or the Middle East to cover specific demands. So American consumers will always be linked to global markets. Moreover, energy independence is not achieved simply by increasing domestic production: conservationists might argue that it would be better achieved by a drop in demand for oil.
Some observers have argued that Washington is now able to get out of the Middle East, as it doesn’t need its oil and gas. As a global power, the US is still highly dependent on the global energy supply system. Even if US oil and gas production continues to rise, it needs to keep an eye on OPEC’s production and price levels. Low oil prices are a threat to US shale, while shortages in the market cannot always be replaced by American crude due to quality differences. The United States may be the world’s largest oil producer, but Saudi Arabia continues to hold the cards when it comes to setting oil prices, thanks to its role as swing producer – with two million barrels a day of spare oil production capacity.
Instability and conflicts, threatening to disturb or even block global energy flows, in and around the Arabian Gulf will affect American strategic interests. Without OPEC producers such as Saudi Arabia, global oil markets are susceptible to risks. Removing the link between Washington and OPEC’s oil will not break their shared interests in global economic stability.
Rising US production has also not brought down OPEC, but resulted in “OPEC Plus”, whereby OPEC co-opted oil producers outside the organization to coordinate global supply limits. Total independence in a global market, especially oil and gas, is not a goal to be focused on. Washington’s main goal should become to be less prone to shocks, while keeping markets stable through strong international diplomatic, commercial and military alliances. The call for independence only serves to isolate Washington, while causing increased instability and threats globally.
Cyril Widdershoven is Director at Verocy B.V., a consultancy based in the Netherlands.