The United States is on track to become the world’s biggest oil producer in a couple of years. Will this change the global oil picture? What are the implications for the environment and Middle East peace?
An oil boom is currently happening in the US mainly due to new drilling technology without actual new oil discovery. The advanced technology enables the extraction of more oil from shale/sand layers and deeper coastal waters. According to the Department of Energy, US oil production will average 11.4 million barrels per day in 2013, just below Saudi Arabia’s 11.6 million bpd. Russia follows third with about 11.0 million bpd. Iran ranks fourth with a much smaller 4.2 million bpd.
Will oil prices come down because of increased US production? No. Market forces will prevent prices from dropping due to: increasing demands from populous emerging countries, dwindling reserves in major oil fields, and costly oil extraction from new but smaller fields. The other reason is the presence of the OPEC cartel. World prices for oil is set by OPEC led by Saudi Arabia with a combined production of about 34 million bpd, which is more than one-third of total world output. Furthermore, most of the world’s oil reserves are located in the warring and volatile Middle East. The only time when oil prices come down is in a world recession such as the big one during 2008-10. The non-OPEC big producers in the US, Russia, China, Canada and Mexico prefer maintaining high oil prices to reap great profits while conveniently blaming OPEC as the bad guy that controls the price.
Despite being a top producer, the US will continue to import oil. Why? The US burns around 19 million bpd, of which the automobile accounts for 70% share. This leaves a production shortfall of about 8 million bpd that must be filled by imports. Oil imports into the US reached its peak in 2006. Since then, the share of imports in national oil consumption has declined to the present 42%, thanks to increased production. Oil independence for the US may be achieved within two decades at the present rate of production growth of around 7% per year.
Due to American oil dependency and OPEC price control, the volatile Middle East will remain a focus of US foreign policy. This does not mean that the US will push for peace between Israel and the Palestinians, who have their own age-old scores to settle that is difficult for any major power to broker. Moreover, US foreign policy is subject to the whims of the president and his administration every election cycle. During the Bush Administration between 2000 and 2008, the Israel/Palestinian peace effort was relegated to the backburner in favor of a military adventure in Iraq, for which they got burned to the point of eventual withdrawal. We don’t know whether the Iranian nuclear pursuit will cause American military intervention while the Iraq debacle is still fresh in memory.
The Middle East situation is a very complex web of oil money, powerful monarchy, religion with radical factions, sectarian conflicts, dictators, military strongmen, uneven distribution of wealth, exploding young population unable to find work, and ancient customs suppressing the rights of women. The West likes to call this the oil curse without realizing their addiction to oil is a curse too. Adding to this extreme complication is the establishment of the state of Israel right in the middle of the region, and the fact that the Jewish community wields considerable influence in US politics. One hopeful sign is the homegrown Arab Spring that occurred in 2011. At least two undesirable elements have been largely eliminated (dictators and military strongmen). Will the chaotic democracy that follows bring some stability and progress? We just have to see how it plays out.
As reasoned above, increasing US oil production will not bring consumers any price relief due to market forces and the OPEC cartel. It will neither bring peace to the Middle East because oil is not the only factor that is causing the complex mayhem. It seems that the biggest victim of increasing US oil production is the environment. When there is money to be made, few people will care about the damages done to the environment.
Nevertheless, a silent revolution is taking place around the world in the propulsion system of the automobile. Why do I bring up the automobile? The reason is that the auto accounts for 60% of worldwide oil consumption and an even higher 70% in the US. We can never hope to change the oil picture without doing something about its biggest consumer, which is the automobile. Switching auto propulsion to electricity supplied by green sources will significantly minimize the global oil curse (See my previous post, “The Future of the Automobile”).
Environmentalists should find solace in the following facts: The world does not depend on the oil-addicted US to drive the hybrid and electric propulsion technology. The real drivers are Japan’s Toyota, Honda and Nissan; and China’s BYD where Warren Buffet has invested a bundle. Recently, South Korea and Germany are joining forces, too. These countries do not produce enough oil, and they understand the environmental damages of burning oil.
In addition, green technology is helping to drive the switch to electricity as solar is achieving cost parity with oil in a few years’ time. In America, Ford has already entered into the hybrid market. So are GM in the electric car, and the high-end carmakers like Tesla and Fisker. This shows the hybrid and electric cars are catching on in the US. They have already caused American automakers to respond for fear of being left behind, if not for love of the environment.