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Daniel J. Graeber

Daniel J. Graeber

Daniel Graeber is a writer and political analyst based in Michigan. His work on matters related to the geopolitical aspects of the global energy sector,…

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Why What You Know About The Global Energy Game Is Wrong

U.S. oil production will beat output from the Middle East for the rest of the decade. And while that gives the United States some leverage on the international stage, at least one prominent global analyst thinks it's wrong to assume oil could be used as a foreign policy tool.

The U.S. Energy Information Administration (EIA) said domestic oil production for the week ending June 13 averaged 8.47 million barrels per day, up 17,000 bpd from the previous week and 18 percent higher year-on-year.

The rise in production has fueled the debate over what to do about legislation enacted in the 1970s that restricts crude oil exports. Critics say the ban would lead to higher prices at home, specifically at the gasoline pump. A January report from the Center for a New American Security, however, said the economic connection that would come from oil exports could manifest itself as "coercive political influence" in foreign affairs.

Paul McConnell, principal analyst for Wood Mackenzie’s global trends service, said U.S. oil production gains are unprecedented, but not necessarily in a way that reshapes the global balance of power.

"Our forecasts show the United States will remain dependent on imported crude oil until beyond 2030," he said in an interview. "So while it's clear the U.S. is emerging as a new and important source of global energy supply, I think it's incorrect to suggest that this supply could become a foreign policy tool."

The International Energy Agency (IEA) said it expects the United States to be the world's leading oil producer by next year, passing Russia and Saudi Arabia. The United States is also on its way to energy self-sufficiency, which would make it less vulnerable to oil shocks like the one that prompted the 1970s export ban.

Related Article: Iraq, oil markets, and the U.S. economy

But that dominance will be brief, and presumably so too would be any perceived geopolitical leverage. U.S. oil production should peak in the next decade and fall from the No. 1 spot at the beginning of the 2030s.

McConnell, in a June 12 report, said the dynamics of the global energy market are indeed changing. China is taking the lead in terms of energy consumption at the same time the Middle East is fading as a lead supplier.

Markets, however, are becoming more interconnected and the relationship between the supplier and the consumer is becoming more and more dependent.

Wood Mackenzie's report points to the Russian gas relationship with Europe as a case in point.

Russia meets about a quarter of Europe's natural gas needs, but most of those reserves run through the Soviet-era pipeline network in Ukraine. That means the European energy sector is at risk because of the ongoing row between Kiev and the Kremlin. And while European Energy Commissioner Gunther Oettinger said he was wary of "political and commercial blackmail" in the energy sector, Russian Energy Minister Alexander Novak said at a June 19 conference in Moscow using energy for political gain "leads to increased instability and worsening of the investment climate in the energy sector."

Some voices in the U.S. energy policy community have said the gas crisis in Eastern Europe, as well as the recent turmoil in Iraq, means that leverage could be gained through a more robust export policy. With Asian demand growing, however, that may appear misguided on the surface. For analysts like McConnell, however, it may be more of a case of bet hedging.

Global demand centers may very well be shifting to Asia, he said, but Europe is also a competitive marketplace.

By Daniel J. Graeber of Oilprice.com

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  • Martin Katchen on June 23 2014 said:
    Does anyone remember Simmons's book "Twilight In the Desert"?
    Simmons pointed out that Saudi Arabia's oil deposits (which are now fully owned and operated by the Saudis) were losing the internal pressure needed to keep output up due to depletion despite massive pumping of seawater into the oil bearing strata. Which is probably why Saudi Arabia has been unable to ramp up oil production no matter how much the US prods or cajoles it to do so.
    What Simmons also mentioned is that there are only three frontier areas for oil exploration and production within Saudi Arabia. The Red Sea will probably be prolific, based on extrapolation from elsewhere in the Rift Valley such as Uganda. But the Red Sea will require deepwater oil rigs which China only just broke the Western major's monopoly on building. The Rub Al Khali has been disappointing, with one major oilfield just south of the Emirates that requires scraping away sand dunes and keeping them away to build and maintain drilling platforms. The Nejd has scattered fields which look suspiciously like the Williston Basin. Perhaps there is tight shale there which can be frakked. And then there is the fourth area, which Simmons says is right along the Saudi-Iraqi border. This is not an area that Saudi Arabia can develop if it borders a hostile, Shia ruled Iraq. But if ISIL should get control of the desert between Saudi Arabia, the Euphrates Valley, the Iraqi Panhandle around Rutba and Kuwait, that area is under control of a friendly Saudi client state that will likely be recognized only by Saudi Arabia and perhaps Pakistan (as the Taleban was before it took Kabul). In that situation, the Saudis are not only free to drill on their side of the border without fear of it's neighbour interfereing on the grounds that the Saudis are horizontal drilling across the border, but the Saudis are in the position to fence ISIL's oil as well. And the way ISIL is consolidating it's power, the only thing that will dislodge it is US boots on the ground---which is highly unlikely. This is probably worth some serious researching by some of the professionals on this list. It provides a direct rationale for Saudi Arabia's support for ISIL--a rationale that fits the facts on the ground.
    all the best
    Martin H, Katchen

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