Shale Gas, American Oil Exports, and Donald Trump: Modern Threats to Stability in the Middle East, By Graeson Michaud

Energy independence, a concept rarely absent from major elections in the United States, but repeated so vaguely it is often equated to political buzzword propaganda more often than a plausible reality for Americans. Yet, for the first time in decades, the United States is not only poised to be completely energy independent, but to also possibly become one of the world’s largest energy exporters. Since the emergence of new oil reserves, made possible through new shale extraction techniques popularized in late 2010. Since then, domestic production of crude oil in the United States has soared. According to the U.S. Energy Information Administration, it has risen from roughly 5 million barrels per day in 2008 to nearly 10 million in 2015, now accounting for nearly half of U.S. oil consumption, which is around 19 million barrels per day.

This growth has been surprising for economists and the countries of OPEC, who believed the expensive process of fracking would not remain competitive on a global scale. Despite promises of the President-elect to make the U.S. energy independent, many were keen to see the end of fracking come swiftly and conclusively, however this has not happened. But why?

Since 1975, the U.S. government has had a ban on exporting crude oil. However, on Dec. 18, 2015, the United States Congress voted to end its 40-year-long export ban. This change in regulation comes at a crucial time for American fracking, with an expanded export market now available American light crude has been able to remain competitive globally. Like the original decision to institute the ban, the decision came in direct response to oil prices and competition with OPEC nations. With historically low prices for crude oil, peaking in 2014 at $114 per barrel but currently only around $45 per barrel, OPEC was able to keep fracked oil non-competitive in the continental U.S. by selling their imports cheaply, however now that exporting this oil is a possibility there are more factors at play that may affect both its price and demand in the future.

The first is the ease of refinement of the U.S. grade tight crude oil that fracking provides. The particular mixture of crude yielded by fracking presents a dilemma for most U.S. refineries, which are equipped to handle heavier mixtures of crude oil and are not well suited for the shale oil. This reluctance to buy domestic crude oil originally drove the prices down for the West Texas Intermediate (WTI) in order for oil producers to make their crude oil competitive for American refineries. However since the export ban has been lifted, difference between the price of Brent crude oil and WTI crude oil has narrowed. According to Bloomberg Market tracking, the price spread of WTI to Brent Crude is currently around $2.85 per barrel, down from about $13.88 in 2012.  This is largely due to its access to international refineries that are now vying for U.S. oil.

For example, according to an article published by the Latin America and Caribbean Energy Program, Venezuela’s state-oil company, Petróleos de Venezuela SA, has purchased two U.S. cargos of 500,000 barrels each, and is actively seeking to purchase an additional 8 million barrels of light crude. It does not end there, over the same time period, U.S. crude oil has been exported to refineries in France, Italy, Germany, and Israel as well, despite a relatively low profit margin in export. The lackluster profit has curbed but not diminished U.S. oil potential.

U.S. crude offers another major advantage over the crude produced by OPEC, and in particular the crude produced by Middle Eastern. The advantage is that crude oil can be consistently and reliably produced. Fluctuations in political stability can have a major effect on benchmark prices. For example, according to the U.S. Energy Administration, in 2013 shortages of Libyan oil caused by the Libyan civil war led to a drop in Brent oil price. If WTI crude were to have been available at the time, its price is estimated to have been $14 to $18 per barrel higher than the Brent, making it far more profitable for U.S. industry. With international markets and interest for American fracked oil currently high, the Paris-based International Energy Agency (IEA) confirms the thesis that price is the only barrier keeping U.S. light tight oil (LTO) supplies from surpassing the record 10 million b/d reached in October and November 1970. This increase in production is a long term goal of American oil industry; Director of Upstream and Industry Operations of the American Petroleum Institute (API), Erik Milito, issued the following statement on December 1st this year:

“More than 80 percent of voters support increased development of U.S. oil and natural gas resources, yet we are facing an avalanche of regulations that stand to harm consumers and businesses and weaken America’s energy future…Instead of government continuing to create more hurdles to developing our domestic resources on America’s public lands, it should be advancing 21st century American energy leadership. A forward-looking energy policy can further help consumers and business, create jobs, and strengthen our national security.”

This statement comes at a time where many within American government are equally eager to see an increase in American oil export. The Republican National Committee has stated publicly on their website that “Energy independence is essential for America’s success as a country.” as well making this promise:  “The Republican Party will encourage and ensure diversified domestic sources of energy.” With a now predominantly Republican congress, and a Republican President-Elect, it is likely that the American government will continue to find ways to support the energy sector.

This has serious consequences for large oil exporters to the U.S. In the same way that new trade relations with Venezuela have managed to ease political tensions, political relations with America’s largest oil exporter, Saudi Arabia, have worsened. Although it would be easy to point out the President-Elects statements of criticism for Saudi Arabia, even going so far as calling for a complete ban of Saudi oil imports, the history of Saudi Arabian and American politics is far more complicated.

Culminating in the 1980 policy “The Reagan Corollary,” the U.S. has officially supported the Saudi regime with military and economic support in exchange for access to its oil markets since the Cold War, however it has been unofficially involved in Saudi Arabia since the end of World War II. This means there are a lot of possible ways in which a Republican congress seeking to curb foreign oil competition could address Saudi Arabia. Although complete loss of military support will remain unlikely as long as the United States is involved in the Middle East, Saudi Arabia is also the world’s largest importer of American weaponry. According to the Stockholm International Peace Research Institute Saudi Arabia purchased $1.19 billion in American arms in 2014, making Saudi Arabia heavily reliant on American arms deals to supply its military.

President-Elect Donald Trump has also suggested at multiple times that a complete ban of Saudi oil from the markets of U.S. would happen during his presidency. If a ban were to take effect, the economic implications would be devastating for Saudi Arabia, accounting for a loss of up to $41.8 billion of the $202.3 billion total value of 2015 export according to the Observatory of Economic Complexity and CIA World Factbook reports of Saudi exports. With a government already running a massive budget deficit, such a loss in revenue could be the tipping point for the country before possible defaults, but further disruption of Saudi oil production would be nothing but a good thing for the U.S. oil industry as the rise in global oil prices caused by a less stable Saudi Arabia would make them more profitable.

It is still too early to tell exactly what course of action the new administration will take or how many promises Donald Trump will fulfill. However, the price of crude oil is likely to go up internationally, and so is the exporting of the U.S. WTI. As stated by the Paris-based IEA, “anybody who believes that we have seen the last of rising LTO (American Light Tight Oil) production in the United States should think again.”

Graeson Michaud is a junior Business Administration student at Ithaca College. Graeson’s academic interests are in the Middle East, international security, and global economics. Graeson will be seeking a Master’s in economics after graduation.

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