Shale Oil and World Politics

Fossil resources are generally distributed unevenly across our planet. For many years only a few countries seemed to be blessed with large quantities of oil while others did not have their own reserves. This disparity created a balance of power between countries with large crude oil deposits, which are mainly organized in the Organization for Petroleum Exporting Countries (OPEC), and most other states with little, insufficient or no own oil. OPEC countries hold more than three-quarters of the world’s crude oil reserves and therefore have been able to dictate the oil price for the last few decades. Over the last ten years however, the established balance of power between oil exporting and oil importing countries has been challenged. Since the United States started to use a new combination of horizontal drilling and hydraulic fracturing, also known as ‘fracking’, to lift tight-oil and shale-oil in the early 2000s, it has advanced to become one of the biggest oil producers in the world. This article will briefly deal with the effects of the second American oil boom on US foreign policy and international relations.

 

‘Black Gold’ with a Long History

The use of oil in its various forms can be traced back to thousands of years. Asphalt made from oil was (supposedly) used as mortar for the tower of Babel and the earliest known oil wells were drilled in China in 347 AD with bamboo poles. Since then, the fossil material has become one of the world’s most important sources of energy and has proven essential for technological progress in every conceivable field. Countries with large industries that depend on oil are, more or less, at the mercy of the oil producers. Therefore, since World War II, the USA has repeatedly used its political, economic and military power to ensure influence in many oil exporting countries in the Middle East and Africa.

In the early 2000s, oil prices started to rise significantly, making it more profitable to produce the fossil resource all over the world. Due to this development and advances in the oil production technology, known as fracking, it became possible for many US companies to produce oil and gas from shale and sandstone formations which were too difficult to reach before. Additionally, abandoned oil fields were reactivated and new oil reserves were discovered all across the United States. More or less overnight, the USA developed into one of the world’s richest oil and gas reserves and even overtook Saudi Arabia as the biggest producer of oil in 2014. The production of fractured oil increased by almost 50% between 2005 and 2013.

This shale-oil boost in the USA fostered a national economic growth and changed the balance of power in the oil business. The United States of America, which accounted for the world’s biggest importer of oil for many decades, suddenly became the biggest rival of OPEC.

 

Effects of the US Shale-Oil Boom 

This development has already shaped international relations. Firstly, Saudi Arabia, feeling threatened by the USA, initiated economic counteractions recently. Saudi Arabia lowered the price for its West Texas Intermediate (WTI) and its Brent crude oil for exports to the USA drastically amid speculations that stockpiles increased. In September 2014 the price for one barrel of WTI fell to $76 and a barrel of Brent Oil cost $83 – record lows in almost four years. The monarchy also tried to consolidate its market shares in the USA. This resulted in small-scale American shale-oil companies (without broad reserve assets) being pressurized. Should more OPEC-countries lower their prices in a similar manner, the majority of the new shale-oil companies will be unable to compete and likely to disappear as fast as they appeared. According to a study of the International Energy Agency (IEA), US fracking firms need an oil-price of at least 80 Dollars a Barrel to stay profitable.

Secondly, Saudi Arabia’s self-interested reduction of the oil-price also led to a mistrust within the OPEC and harsh criticism from several other member states. For example, Venezuela and Ecuador finance a large share of their expenses through earnings from oil and have been affected negatively by the decreasing price. Furthermore, Russia reacted in a similar manner, even accusing Saudi Arabia of a political conspiracy against itself and Iran. These examples illustrate how insecurity and anxiousness within the oil cartel grew as a result of the US shale-oil boom. OPEC even scheduled an emergency meeting in late November 2014 to further discuss tensions and to decide on a response to the changes in the oil market.

Thirdly, with such huge reservoirs of oil and gas in their country, the United States does not have the pressing need to foster the expansion of renewable energies anymore. Shale-oil reserves do not seem to empty anytime soon and so called peak-oil calculations seem to be history. Although the USA and China just signed their first compulsory agreement to reduce greenhouse gas emissions by 20-28 %, America will surely not jeopardize its fossil economic upswing for environmental goals. This could be one reasons for the reluctant reaction of the US-government on mandatory climate agreements in the past years.

 

Possible Future Developments      

In addition to these developments, long-ranging policy changes resulting from direct effects of shale-oil in the USA must be expected. Numerous complex scenarios are possible, but hard to predict. Following the example of the USA, many countries have started to explore their soils for oil and gas to be independent. If they are successful, it is quite probable that the balance of power in oil business tips even further, which could eventually lead to a domestic destabilization of middle-eastern oil exporters and the entire region. Already existing rivalries between Sunni and Shia countries could intensify and create regional conflicts.

Since the USA is not crucially dependent on middle-eastern crude oil anymore, cost-benefit calculations for a strong militarily presence in the region seem to have changed. Besides the economic crisis, the newfound independence of the United States surely is an explanation for Obama’s rather passive policy in the Middle-East. The same year that Barack Obama took office, the production of oil and gas from shale and sandstone formations started to boom in the USA and became a significant factor for the economy. Whereas former US-Presidents secured their influence in several middle-eastern countries with broad military actions, major oil fields in Iraq and Syria have been ceded with late resistance to the terrorist organization ISIS in the past months. Although it is hard to imagine that it would withdraw completely from such strategically important landmarks, a continuing reduction of US military and political presence in the region is a definite possibility.

 

Future Problems Remain

The American shale-oil boom has not only created a large domestic economic growth in the USA, but also influenced the balance of power in the oil-market. Fracking could temporarily solve the energy problems for the USA, but also trigger a reformation in its foreign policy. If shale-oil proves to be more than just a short hype and if the reservoirs are as big as experts and businessmen assume, the United States is likely to turn its interests away from the Middle-East and almost completely towards east and south-east Asia, as Barack Obama had emphasized the strategic importance of this region from the beginning of his presidency.

However, what is most important is that the American shale-oil boom does not tackle long-term problems, but only procrastinates them. After all, shale-oil and shale-gas are finite resources that will eventually deplete. While the current boost in the USA seems to be sustainable, it most certainly is not. On the contrary, it currently destroys opportunities for the realization of renewable energy projects, because companies concentrate again on the production of the fossil resources. In the short run, it may seem easier and more profitable to drill for oil than to fund research in green energy. Given its limits, however, the USA will only be able to compete economically, if it continues investing in future technologies despite all short term benefits resulting from shale-oil and gas.

 

Author Biography

Felix Troeltzsch recently graduated from the University of Jena with a master’s degree in Political Science, focusing on International Relations and Peace Studies. Before that, he studied International Relations and American Studies at the University of Leipzig and University of Warsaw. Felix is mainly interested in international conflicts, security policy, human rights, the European Union and the Middle East. During several stays abroad he has dealt intensively with the Balkans and the Black Sea region.

Picture Credit: Paul Lowry

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