Syed Rashid Husain The world has changed — and so has the global energy dynamics. The shale gas and tight oil revolution — unleashed in the northern hemisphere of the world and which has the potential to spread to the far flung corners of the world too — brings to fore a number of geopolitical issues. With North America no more ‘that dependent' on the oil rich Middle East for its energy needs, as it was, would it continue to play the role in the Middle East that it has been playing for last many years?
In the realm of geopolitics, this remains a big if. There are many in Washington — and all around — who seriously think that the much hyped upon energy independence is finally in their grasp. As Saudi Arabia becomes less of an important supplier to the United States, the world's biggest oil consumer, some see the special relationship between the two as slowly changing. Steven Chu the former US energy Secretary during a trip to Riyadh, almost at the beginning of his tenure, while conceding that the crude glue that kept Riyadh and Washington together was slowly peeling off, told this correspondent: Yes, Riyadh and Washington now needed to develop new bondages. “We are still partners but less intimate partners than we once were,” Chas Freeman, who served as US ambassador to Saudi Arabia under former President George H. W. Bush, was quoted as saying. The ongoing oil shockwaves were pushing OPEC out of the groove of the global oil mover and shaker, says the IEA. The US shale boom will send “shockwaves” through the global oil trade over the next five years, benefiting the nation's refiners and displacing OPEC as the driver of supply growth, the IEA pointed out. In a recently released forecast, the IEA said supply growth — fueled largely by North America — will outstrip the increase in demand over the next five years, resulting in a buildup of global spare capacity that is typically associated with weak crude prices. “North America has set off a supply shock that is sending ripples throughout the world,” said the agency's executive director, Maria van der Hoeven. “The good news is that this is helping to ease a market that was relatively tight for several years.” Besides the geopolitical aspects of the development, major oil producers hence needed to look at the entire development from a market viewpoint too. Would this development impact their share in the global energy markets? Would it lead to softening of the markets further? How then to cope with all this — while public expenditures are on a rising trajectory. “Reduced demand for oil from the US could undermine the oil prices globally, thereby placing pressure on regional budgets that are increasingly reliant on the price of oil staying firm,” Tim Fox, chief economist at Emirates NBD, told the CNBC.
The era of soft market conditions is dawning upon us. But not everyone seems rattled. Long-term players are taking the development in its own stride — as inducing stability into the otherwise chaotic markets. Oil Minister Ali Naimi seems unperturbed. “This talk of ending US reliance on imports is naive and simplistic,” he said on April 30, while speaking at the Center for Strategic and International Studies, in Washington. And he viewed the US oil revolution as “great news” for an economy struggling to emerge from crippling recession. More oil reserves, like those from the Bakken and Three Forks formations, will add stability to an increasingly global market, he noted, emphasizing, the United States will remain one of the top energy consumers in the world and will continue, with or without the shale revolution, to depend on Middle East oil. Talk of breaking away from overseas oil, his said, is a “naive (and) rather simplistic view.” “Talk of energy independence fails to recognize the interconnected nature of global oil (and) global energy markets,” he said. “We are all part of a global market, and no country is truly energy independent.” “I do not go along with the opinion that increasing US liquid production means the United States could and should detach itself from international affairs,” he said. “In fact, perhaps the question is not how the US can achieve energy independence, but to what degree it will, in the future, be prepared to export its oil and gas supplies.” Al-Naimi likened calls for US energy independence and the end of imports from the Middle East — as what “we” characterize as “energy isolationism” — to peak oil theory. “Expert opinion a few years ago was that the world was running out of oil […] In 2009, I was here when peak oil was really at the peak. ‘Peak Oil is here,' they said. ‘The age of oil is over,' they said. I haven't heard much from them lately.” And Naimi had figures up his sleeves to underline the point. Exports from Saudi Arabia were higher in 2012 than at any time since tight oil production began in 2009. And even though US oil imports fell to 8.5 million barrels a day last year — the lowest level since 1997 — imports from Saudi Arabia and Canada actually grew. As per the US Energy Information Administration, imports from Canada touched a record 2.4 million barrels of crude oil per day, up 8% from the previous year, while imports from Saudi Arabia increased 14% to 1.4 million barrels a day, the highest level since 2008. The increase in Saudi and Canadian imports highlights some crucial points about crude oil: Not all crudes are created equal, and US refinery demand for them varies depending on their qualities, such as density and sulfur content. Over the past several years, many refiners invested heavily in the equipment and upgrades necessary to process heavy crudes at their plants. So because they don't want to let their upgraded facilities sit idle, Saudi and Canadian oil remains in high demand. Meanwhile, though, US refiners have managed to drastically slash imports of light, sweet crude oil — most notably from Nigeria and Angola — thanks to booming light production from US shale plays. And in separate remarks to The Financial Times, Khalid Al-Falih, the Saudi Aramco CEO too welcomed the boom in US shale production underlining it would reassure consumers about the reliability of oil supplies. The shale revolution had helped ease fears about excessive reliance on the Middle East, and encouraged governments to be more “pragmatic and rational” about energy policy. In the long term, Al-Falih also believed that the rising US production would not take away its market. “We always look at ourselves being in this business for generations to come, and want to position the industry for that long-term prosperity and harmony with society,” Al-Falih added. “Oil is going to be the fuel of choice, in terms of its overall performance, for an extended period of time, and we need to manage it, we need to invest in it.” By pushing concerns about security of supply into the background, the shale boom helps encourage technology and policy choices that will lock in demand for oil. Despite strong headwinds, Saudi oil officials are on a public relations spree, putting up a brave, smiling face.
