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The War That Would Transform Oil Markets

Tensions between Saudi Arabia and…

Wolf Richter

Wolf Richter

Wolf Richter has over twenty years of C-level operations and finance experience, including turnaround situations and startups. He went to school (BA, MA, MBA) and…

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Geopolitical Impacts of the US Oil & Gas Boom

Geopolitical Impacts of the US Oil & Gas Boom

Much digital ink has been spilled about the oil and gas boom in the US, the result of ever improving fracking technologies, and whether or not it will lead to energy independence, or even turn the US into an oil exporter. Now a “confidential” report by the German version of the CIA, the Bundesnachrichtendienst (BND), seeped to the surface. It sketched out the boom’s geopolitical consequences. Biggest loser? China.

BND reports have conveniently seeped out before. For instance, a “secret” report on how the pending bailout of Cyprus would use German taxpayer money to bail out rich Russians who have deposited their “black money” in the Cypriot banks that are now collapsing caused an uproar—and threatened to derail the bailout.

The oil and gas boom is transforming the US, once the world’s largest oil importer. Natural gas production in the US already exceeds demand, and the glut last year forced prices down into the realm of maximum pain. So the US could become a major exporter of natural gas—pending approval by the government and construction of LNG export terminals.

Oil independence is tougher. The US is still a large oil importer. Yet, if the current boom dreams come true, the International Energy Agency (IEA) might be right in its estimate that the US could become the largest oil producer in the world by 2020, surpassing Saudi Arabia and Russia. Even if that estimate is off the mark, the US will certainly be much less dependent on oil imported from countries other than its reliable neighbors, Mexico and Canada.

One of the reasons—or perhaps the only reason, despite pretexts galore—the US has been so deeply involved in the Middle East, including long and expensive wars, and why the highly unpalatable regime of Saudi Arabia has been an anointed ally for decades, is oil. The US is hooked on it and must get enough of it at a manageable cost to keep the wheels of the economy greased.

Related Article: Tapping into Pakistan's Massive Oil and Gas Reserves

But if the US is able to do without oil from the region, it would give the government a lot more “freedom to act” in the realms of foreign policy and security, predicted the BND report. And the constant threat by Iran to close the Strait of Hormuz, through which much of the oil from the Arabian Peninsula transits? It would be shrugged off in Washington.

US independence from Arabian oil would impact the relationship and balance of power between the US and China, according to the BND report. Struggling to meets its skyrocketing demand for oil, China will buy about half of the oil produced on the Arabian peninsula, and it will, like the US before it, become dependent on it—but unlike the US, it won’t have the military power, at least not initially, to protect its energy sources and transportation routes.

The vast sums of money the US spent on military adventures worldwide, even the mere presence of its fleet, secured these transportation routes. To the great benefit of China. But once the US is no longer dependent on Arabian oil, the government might be unwilling to plow money into the military capability needed to secure the continued flow of oil from the region.

“The vulnerability of the Chinese energy supply routes” would grow, the BND report predicted, which would give the US more leeway in dealing with China. Thus, in the worldwide geopolitical scramble caused by the US oil boom, China would be the biggest loser.

Russia would also be a loser, according to the report. The main supplier of fossil fuels for central Europe would face more competition from countries, such as Nigeria, that used to deliver a significant portion of their production to the US. They would have to find other customers, including in Europe, Russia’s energy backyard. The ensuing downward pressure on prices could hit Russia where it is vulnerable: production costs in its frigid and remote northern areas are higher than in other parts of the world.

And OPEC members would be losers. Their market power would dwindle further, and the cartel’s feared ability to push up prices might drift toward irrelevance—as not only the US but numerous other countries, particularly in Africa, are beginning to experience their own oil booms

Related Article: Oil Exports, Politics and Propaganda

Winners of the US oil boom? Oil importing countries, particularly those dependent on Russia, according to the BND. Among them Germany, which would “significantly increase the security of its energy supply.”

In the US, the oil and gas boom would improve the competitiveness of the still listless economy as energy costs would decline, relative to other industrialized countries. For example, the cost of electricity in the US is already 40% lower than in Germany. Energy-intensive industries will find the US a more attractive location. The BND even sees the possibility that the US might be able to get a grip on its gargantuan trade deficit as oil imports shrink, cutting it in half by 2020—which, it imagines, would prop up the dollar as a reserve currency for a while longer.

In its January report, OPEC said the US may post the highest oil-production increase among non-member states this year—while production in some member states is declining. And now, OPEC is fretting about Washington. Read.... Why OPEC Is Worried About The US Congress.

By. Wolf Richter




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