No country, No Nation, has ever added oil production capacity – yes ever – like the United States has in the past few years. America has gone from producing 5 Million barrels of oil per day in 2011 to over 7.5 Million barrels this past year; and will soon surpass 10 Million barrels of oil production domestically. It’s an incredible oil boom that will have a profound impact on the lives of ordinary Americans.
By the time Obama leaves office, he will have presided over a country that has gone from importing 11 Million barrels of oil a day to actually becoming a net exporter of energy. The center of gravity of global energy production has swung toward the Americas as shale oil and gas fields in North Dakota and Texas hum with activity. America is moving to the fore as the world's largest producer of petroleum and natural gas.
For the past 40 years, U.S. presidents have launched distant wars, allied with autocratic sheikhs and dispatched naval fleets to protect sea lanes, all for the imperative of keeping foreign oil spigots flowing. That imperative has now subsided.
Today, U.S. taxpayers foot the bill for Navy ships that largely protect supertankers headed to Asia. China overtook the United States as the largest importer of Persian Gulf oil two years ago. That trend will surge, and "it's going to raise all new questions," said Amy Myers Jaffe, an expert on global energy production at the University of California, Davis. "You have the Chinese and other Asians free riding on a U.S. security presence, and I'm not sure that's sustainable," said Manning of the Atlantic Council.
That change will reorder the globe in ways large and small. This is very, very profound.
Most U.S. experts concur that a big loser from the growth of the U.S. shale industry will be Russia, which has locked in Eastern and Western Europe as clients for its natural gas, leveraging the reliance on its supplies for political gain.
The Russian share of the European Union's natural gas imports is expected to drop, however, from the current 34 percent to below 15 percent over the next 10 to 15 years, according to some analyses, replaced by supplies of liquefied natural gas from the United States.
“The United States should see its role in the world as a singular superpower enhanced and prolonged," according to a recent Citigroup report. And according to a senior Chinese Statesman Wu Sike (a former Chinese envoy to the Middle East and a key member of China’s foreign affairs committee, “The United States will take a more dominant position in global energy distribution."
While OPEC’s share of world energy production is slated to initially drop from roughly 50% (today) to about 35% for the next decade, by mid-2020’s, OPEC should be back up to 50% because of soaring economic growth in Asia – notably China and India. Iran (and most other producers in the Middle East) will eventually see booming trade with major economies in Asia.
Last time, a shift of this magnitude occurred a revolution was engineered in Iran. When both Alaskan Oil (US) and North Sea Oil (in Britain) came on stream, one ‘major’ producer had to be effectively shut out of the market to make space for new oil (and to maintain tight market pricing). Alaskan Oil and North Sea oil were extremely expensive to extract, and it was imperative that oil and gas pricing remain high for at least a few decades until core production targets were met. By the way, it was NOT a coincidence that BP was a major investor (and player) in both Alaska and North Sea oil. Britain’s economic demise was thwarted with this huge strategic coup by the Mullahs (in exchange for a drop in Iranian oil production). And as we Iranians all know, Britain's prosperity was achieved via North Sea oil largely at the expense of Iran (and Iranians).
We are now witnessing a similar – cataclysmic – strategic shift that could change life Iranians again.
In the short term, the Iran bogus 'nuclear' deal will ease the political risk premium baked into oil prices. In the medium term a comprehensive deal with Iran could add 1 million or more barrels per day to the market. In the long-term a gush of Iranian oil would soften oil prices; and this ‘gush’ might be enough to kill the economics of America’s tight oil boom. A gush of Iranian oil would NOT be good for the U.S. (and its oil boom) – unless (of course) there is a plan to undermine one OTHER major producer out of the market!
Right after the Iran deal was announced the price of benchmark Brent crude slid about 1.5% to $109 per barrel. West Texas Intermediate crude was down about 1% to $94 per barrel in mid-morning trades.
These modest declines are a reasonable reaction to the deal signed over that weekend. No one is expecting any flood of Iranian crude back to the market. The White House insists that sanctions on Iran’s oil and banking sectors remain in place and that the international community will “continue to enforce these sanctions vigorously.”
How much geopolitical risk is baked into the price of a barrel of oil? At the height of former President Ahmadinajad’s bellicose anti-Israel rhetoric and threats to blockade the Straits of Hormuz, and Israel's counter-threats it was understood that as much as $20 per barrel represented a risk premium. All that premium could quickly melt off prices in months to come, and bring crude oil down from about $100 a barrel in the U.S. into the $80 range.
Since the toughest sanctions were imposed in 2012, Iran’s oil production has declined 900,000 barrels per day, according to analysts at Tudor, Pickering & Holt. Much of that production is heavy oil. Saudi Arabia has adeptly replaced those Iranian barrels in the market by boosting their own production by roughly 1 million bpd. But when it comes time for Iranian oil to come back onto the market, the Saudis (though no friends of Iran), would likely dial back their exports to make room.
But how much room will the Saudis be willing to make in the years ahead? Iran has the reserves to add millions more in supplies. It would take time. As Bill Herbert, analyst at Simmons & Company, has pointed out, “sustainably increasing production levels well above 3 million bpd for a consistent period of time will most likely require substantial foreign investment from global oil companies and western service companies (in Iran).”
Some of these companies have recently jumped at the opportunity to invest in untapped oil fields just over the border from Iran in the Kurdish region of Iraq. The fields in the Kurdish region have proven to be enormous, the flow rates prodigious, the ease of recovery unmatched anywhere else in the world. Iran’s potential though is even greater.
Given sufficient investment in drilling and infrastructure, there are ample oil reserves in Iraq and Iran to add another 5 million barrels per day (bpd) to global oil supplies within 10 years. In addition, there remains roughly 1 million bpd of Libyan production offline due to continued unrest there. Nigeria too has at least 250,000 bpd shut in. And let’s not forget Israel. Israel now sits on some of the largest oil and gas reserves in the world on its northern Mediterranean shores. Solve all these political and security problems in the Middle East and other countries and the world could suddenly be awash in excess oil.
Over the long run the easing of sanctions against Iran spells trouble for the economics of the tight oil plays that have sprung up across the United States in recent years. The Eagle Ford and Permian Basin and Bakken fields need sustained high oil prices to make the economics of expensive drilling and steep decline rates pay off.
It’s no coincidence that America’s great oil and gas renaissance has coincided with sanctions on Iran and unrest in Libya. The concern for U.S. drillers is that successful Middle Eastern diplomacy could end up being the worst thing for their business. If crude oil benchmarks were to fall to $75 a barrel and stay there for a couple months you’d see drilling rigs across Texas and North Dakota fall silent.
The U.S. onshore oil industry has been perhaps the brightest spot in America’s economic recovery. How ironic then that America's recovery might end up being a casualty of the Middle Eastern peace making processes. Which brings me to my final point, obviously the U.S. will NOT jeopardize its recover (and therefore prosperity) by accelerating Middle Easter peace. I hate to say it, but there is obviously something huge a foot. There has to be a plan in someone's back pocket.
Surely, if there is normalization of relations with Iran, then production somewhere else has to ‘drop’ for a while. Could the U.S. be ‘turning’ away from its key ally Saudi Arabia? Might they be planning to undermine or double cross another key (dictator) ally (like they did with the Shah of Iran) last time they needed production off the market? Or might negotiations with Iran be a total farce, with no real intent to ‘normalize’ at all! Would a 10 year hiatus of oil and gas from Saudi Arabia, Qatar and Bahrain be long enough to undermine those feudal dictatorships and put in democratic states - or is the plan to democratize the Middle East now totally off the table? Will the dictatorships in Azerbaijan, Turkmenistan, Uzbekistan (budding new oil and gas producers from the Caspian Sea) survive this 'neccessary drop' in global production?
Saudi princes are up in arms, lobbying hard against any sort of normalization with Iran. Israel too is fighting a good fight – doing everything possible to undermine a ‘final’ deal with Iran. Both Qatar and Saudi Arabia are funding al Qaeda and fundamentalism everywhere, with a goal of destablizing Iraq's Central (Shia) government and fighting a good fight in Syria for them there too. Would the Brits 'allow' it, with their whole economy now fundamentally based on oil and gas (theft) from Iraq, Azerbaijan and Qatar? What about Putin, will he sit idly by while Europe diversifies away from Russia?
Everyone understands that if there is a deal with Iran's Mullahs and Iranian oil comes back on the market, someone’s oil will have to be removed for roughly 10 years. The question is whose?