The world as we know it would not exist without oil. It powers our economy, turbocharged the industrial revolution, and allowed us to travel across the world in a matter of hours, not months or years. It made the world smaller and the possibilities bigger. It changed our relationship with the Earth and irreparably changed the climate and altered delicate ecosystems. And it has formed an intricate web of power relations and geopolitics, from all-out wars to strategic alliances, that work in the public eye and behind the scenes to shape our countries and our lives. “In the modern era, no other commodity has played such a pivotal role in driving political and economic turmoil, and there is every reason to expect this to continue,” read a Brookings Institution study. Arguably, no other region has been as thoroughly transformed by oil as the Middle East, a region whose natural oil reserves thrust it into the center of the world stage and channeled huge flows of cash into its economy while painting a target squarely on its back. In the 1970s the threat of a crippling oil shortage shifted even more power into the hands of those markets that had plenty of production capacity to spare, almost all of which were in the Middle East.
“An important element in the world oil market is ‘spare capacity.’ This is production capacity — that is, oil wells — that are not actually in operation, but can be swiftly brought online if prices spike or if a disruption knocks out supply elsewhere. Today, most of the world’s spare capacity is in Saudi Arabia, with some in the United Arab Emirates and Kuwait,” Daniel Yergin wrote for the Dallas Morning News this week.
The Middle East’s consolidation of power in oil markets and the foreboding threat of oil shortage informed the priorities of the United States’ own foreign policy strategies for decades. And then came the shale revolution. The United States’ extreme uptick in shale and gas production not only allowed the country to improve its own energy security and become less dependent on imports of black gold, it also changed the course of geopolitics for the entire world, and especially the Middle East that had built an empire on their own oil autonomy and exports. Related: Colombia Struggles To Overcome Its Oil Curse
In his article titled “How the shale revolution has redrawn the global political map,” Yergin illustrates how the explosion of the U.S. shale market took power out of the hands of OPEC and handed it over to the “Big Three”: the United States, Russia, and Saudi Arabia. This argument is illustrated through two case studies: the United State’s leveraging power in the Iran Nuclear Deal and Russia’s diminishing natural gas chokehold on Europe. In the first case, the United States was able to fill the gaps left by Iran’s oil in global markets when imposing sanctions, giving them much greater political leverage on a global scale. In the second case, Russia has been the predominant provider of natural gas to Europe for decades, giving them outsized bargaining power in the region. This, too, was destabilized by a flood of cheap natural gas from across the Atlantic.
But now, the multi-billion dollar question is how much longer will the shale revolution allow the U.S. to remain at the helm of global energy negotiations and geopolitics in general? There’s an argument to be made that this era is already over. The shale revolution has been pronounced dead many times over as production has waned over the last years in the U.S. and has all but ground to a halt thanks to the COVID-19 pandemic, which brought the West Texas Intermediate crude benchmark to nearly $40 below zero in April.
And there’s a new sheriff in town. With peak oil just around the corner, the world is finally diving headfirst into the clean energy transition that experts have been advocating for decades. In Europe, Big Oil is already transitioning into Big Energy and working at a breakneck pace to diversify their portfolios to be less dependent on fossil fuels. Countries as far-flung as Australia, Chile, and China have set ambitious goals for decarbonization and have a very decent chance of making it happen thanks to a mix of hydrogen (in the case of Australia), renewables, and nuclear (in the case of China), and even energy communities in Chile. Even countries without sweeping decarbonization plans are developing green stimulus packages to recover their post-pandemic economies, and no one wants to get left behind in the brave new post-oil world.
By Haley Zaremba for Oilprice.com
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