Today's Opinions, Tomorrow's Reality
Victim of its own Success
By David G. Young
Washington, DC, October 23, 2018 --
A stunning surge in oil production from America's fracking boom has destroyed American control over oil prices.
When America's oil production reached 11 billion barrels per day earlier this year, it once again became the largest oil producer in the world1. After declining steadily since the 1970s, America's oil industry has made an stunning comeback thanks to hydraulic fracking technology unlocking its vast shale fields. What began as a niche technology has now allowed the country to surpass even oil giants like Russia and Saudi Arabia.
Putting aside the chest-thumping pride it instills in Americans, the fracking boom has been a huge boon to most other nations, too. As American oil production ramped up over the past decade, it kept a hold on oil prices. The high costs of drilling in shale fields means that oil must reach a sufficient price point for drilling to be profitable. And since each shale field is different, fields with higher drilling costs have been waiting idle while oil prices are too low to justify production. This quirk has had the fantastic result of putting a lid on oil prices — the more prices go up, the more American producers ramp up production, forcing prices down again.
This has served to de-fang the bad boys of the world like Russia and Saudi Arabia, who previously used the threat of driving up oil prices to push their devious agendas and used the profits from high prices to fund their despicable acts. That these nations were prevented from doin this is a fantastic foreign policy success — one that was accomplished not by U.S. invasions, sanctions or air strikes. It was achieved as the result of free markets and the ingenuity of small oil companies in America. What's not to love?
The problem is that this feel good story has finally come to an end. America's fracking boom has been so successful, that it has destroyed its own influence over the price of oil. With production rates so high, America's oil infrastructure just can't keep up. Pipelines in Texas and the Midwest are running at capacity, and oil terminals on the gulf coast are as well.2 Originally built for the mid-20th century oil industry, it is now straining from oil flows never before imagined.
Although its quick and easy to bring new shale drills online as a result of a oil price spike, there is absolutely no point in doing so if you can't get the oil to market because there are no pipelines or free terminals to get it there. Unfortunately, this situation is unlikely to change any time soon. While it may be quick to bring a new shale field online, building new pipelines and oil terminals takes may years or decades. So long as America's delivery infrastructure remains saturated, the days of America serving as the world's oil price shock absorber are now over.
Of course, there are still plenty of benefits to American oil production. Its output has helped prevent price rises that would have otherwise resulted in the collapse of Venezuela's oil output due to economic mismanagement, large declines in Libya's oil output due to war and civil unrest, and unreliable output from Iran due to sanctions from the West and more recently the Trump Administration alone. It's also true that oil proceeds flowing to fields in Texas and on the Great Plains are likely to go to less evil deeds than if the same money had gone to Moscow, Riyadh or Tehran.
But because America's production has reached a ceiling, these same bad boys know they can once again use threats to cut production and send prices skyrocketing to get what they want. After the murder of a dissident journalist in Saudi Arabia's Istanbul Consulate earlier this month, Saudi Arabia announced it would retaliate against any sanctions: "The Kingdom also affirms that if it receives any action, it will respond with greater action."3 It's clear from that statement that Saudi Arabia is acutely aware that America can't control the price of oil any longer.
2. Wall Street Journal, Frackers Bet on New Terminals to Boost Oil Exports, October 21, 2018
3. Reuters, Saudi Arabia Says Will Retaliate Against any Sanctions Over Khashoggi Case, October 14, 2018