OPEC is heading for a final showdown with shale. Its grand alliance with Russia to cut output has revived its own fortunes temporarily by boosting prices but it has also cranked up drilling across America.
That’s good for the world’s largest economy and biggest consumer of crude but bad news for some of the major producers in the Middle East, especially Saudi Arabia. Despite its own vast defence spending, the kingdom still depends heavily on US military power for its security and to protect the Strait of Hormuz: a narrow sea lane through which most of its crude and that of Iran is shipped to markets.
Although the US Fifth Fleet is unlikely to suddenly sail away from the Gulf, a key pillar underpinning the reasons for it to remain has started to crumble. Freed from the need to secure access to Arabia’s vast stores of crude in order to guarantee affordable gasoline for America’s motorists, Washington may begin to care less about what happens in the politically volatile region in the future.
This was certainly the impression left by one of President Donald Trump’s top energy policymakers speaking at the International Petroleum Week gathering in London recently.
“We’re poised to become a net energy exporter within the next decade, or perhaps even earlier,” said Dan Brouillette, the US deputy energy secretary, speaking at the event, which draws the cream of the oil industry’s policymakers and executives. “This spells not just energy independence for America, it spells energy dominance, complete energy security,” he added.
And Brouillette didn’t stop there. “It means greater national security as we cease depending on unstable and, yes, sometimes even hostile sources, while we export energy to our friends abroad, freeing them from a similar dependence,” he concluded. His remarks could be interpreted as a subtle warning to Opec. The strategic argument for America securing at great cost to its taxpayers a region where about 60pc of the world’s proven oil reserves remain is beginning to weaken because of shale.
Washington’s unofficial pact with Riyadh has held fast since President Franklin D Roosevelt met with King Abdulaziz, the founder of modern-day Saudi Arabia, aboard a battleship in 1945. But shale, not naval power, has now fundamentally changed the game.
Of course, much of the energy revolution in the US started long before Trump moved into the White House. Shale industries blossomed under the previous administration of President Barack Obama.
However, the shift even further towards energy independence is a genuine success for the much-criticised Trump team. Tax cuts and a slash-and-burn approach to regulation have all also helped revive drilling.
US crude production has now reached staggering proportions, rivalling the world’s biggest producers. Output hit a new milestone above 10m barrels per day (bpd) in November, which represents a 47-year high. The US Energy Information Administration is now predicting that output will reach previously unimaginable records of 11m bpd by the end of this year.
Another sign of its growing power in the oil market came earlier this week when the first, very large crude carrier – of the kind capable of loading two million barrels – loaded a cargo from the Louisiana Offshore Oil Port. Ironically, the gigantic vessel sailed under a Saudi flag. Although Trump and his team can claim some of the credit for this extraordinary surge in US supply, the main catalyst has arguably come from Opec and Russia cutting output. Their combined decision to reduce output for the remainder of the year by 1.8m bpd to obliterate global stockpiles and regain control of previously free-falling prices reversed a slump in America’s shale industry.
Opec is aware of the risk it is taking both reviving US shale and working closer with Russia to create a so-called “super group” of producers to manage the market in the future. But in reality its choices are limited. The economies of its members depend on boosting oil prices, which have more than doubled from the lows seen two years ago to trade at around $65 per barrel this week. Even at these levels, Opec’s petro-dollar-geared economies will struggle to break even.