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Age Of Cheap Oil Tilts Geopolitical Power To U.S.

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Rich Miller, Bloomberg

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.

Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.

“A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup Inc. in New York, said in an e-mail. “Undoubtedly some of the geopolitical changes will be momentous.”

Oil Prices

They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War.

Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead.

‘Geopolitically Important’

Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor, an advisory company in Austin, Texas. “It drives economies around the world” and is located in some “usually very volatile places.”

Benchmark oil prices in New York have dropped more than 30 percent during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

“For 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand,” said Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of the commodity. “Now the defining factor is the astonishing growth of U.S. oil production.”

Price War

Saudi Arabia and Kuwait have begun what energy economist Philip Verleger calls a “price war of necessity” in response, aimed at protecting their market share and forcing producers in the U.S. and elsewhere to reduce output.

So far, U.S. companies aren’t flinching, believing they have more staying power than many of Saudi Arabia’s 11 partners in the Organization of Petroleum Exporting Countries, or OPEC.

“Saudi Arabia is really taking a big gamble here,” said Archie Dunham, chairman of shale producer Chesapeake Energy Corp. in Oklahoma City. “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the U.S. But you’re not going to see it stop.”

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