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Coping with the US Hydrocarbon Revolution - ASHARQ AL-AWSAT English Archive
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A US worker hangs from an oil derrick in outside of Williston, North Dakota, in this Tuesday, July 26, 2011, file photo. (AP Photo/Gregory Bull)

A US worker hangs from an oil derrick in outside of Williston, North Dakota, in this Tuesday, July 26, 2011 file photo. (AP Photo/Gregory Bull)

Washington, Asharq Al-Awsat—The United States is in the midst of an “oil boom” and a “hydrocarbon revolution” that will add significant new supply to oil markets over the next five years, according to the latest Medium-Term Oil Market Report by the Paris-based International Energy Agency (IEA). This new US oil will dramatically transform global oil markets, with significant implications for Middle East oil and gas producers.

Over the past decade, oil markets have followed a fairly predictable pattern of rising demand from China and the emerging economies has been fueling higher prices. Among Organization of Petroleum Exporting (OPEC) countries and other Middle East oil producers, this has been good news: it has provided growing export revenues, large budget surpluses and swelling cash reserves.

The IEA report notes that the expected dramatic rise in US shale oil production over the next five years represents a transformative moment as important as the rise of Chinese demand over the last fifteen years. Analysts told Asharq Al-Awsat that the report suggests downward pressure on oil prices and a gradual decline in the power of OPEC and other Middle East producers—the key word being “gradual.”

“This is not 1985 or 1998,” a senior Western oil executive told Asharq Al-Awsat, referring to years when oil prices fell dramatically, “but it will put downward pressure on the price, and we could see a long-term decay in price and also in the power of OPEC. It will be gradual, not sudden, but we are moving in that direction.”

Maria van der Hoeven, the executive director of the IEA, called the growth of shale oil and gas “the North American hydrocarbon revolution,” and she said recently that “supply growth is even steeper than previously expected.” This “revolution” will make the United States a net exporter of oil, dramatically shifting its status as the world’s largest importer of oil.

America’s shale revolution has been driven by new technologies that allow energy companies to capture and release oil and gas from tight rock formations deep in the earth. Van der Hoeven described this new shale oil and gas supplies as “a real game changer” that will transform global supply chains, challenge OPEC, and anoint the US as the world’s largest energy producer.

By the year 2015, the IAE estimates, the United States will overtake Russia as the world’s largest gas producer. The US will also contribute nearly two-thirds of all new oil supply that enters the market over the next five years.

What does this mean for Middle East oil producers and for OPEC? What about oil prices? Across the Gulf Cooperation Council (GCC) countries, rising government spending patterns has meant that the break-even price of oil—the price at which budgets are balanced—has risen dramatically. Thus, oil prices need to stay high in order to meet budgetary needs.

“I do not see a crash in the oil price as a result of all of this new US supply,” said Robin Mills, an energy specialist for the Dubai-based Manaar oil and gas consultancy, “but we can likely see a slow decline in price.”

Mills notes that demand is still robust in Asia, and the new US supply will help meet that demand, taking some pressure off of OPEC. He notes that new shale discoveries in Argentina, Russia and elsewhere could also diminish the influence of OPEC.

Jean-François Seznec, a senior fellow at the Brookings Institution in Washington, D.C., and an energy specialist, told Asharq Al-Awsat that the rise of shale gas supplies in the United States could pose a long-term challenge to Qatar’s dominance of Far Eastern markets—but it will not be a sudden change.

China does not currently have the technology to support its own shale oil and gas efforts, but it will be moving in that direction. Significant Chinese shale oil and gas production would be the next “game changer,” many analysts argue, but that still seems a distant prospect.

Seznec also noted that he could envision the day when GCC states import liquefied natural gas (LNG) from the United States. Inevitably, US imports from the Middle East will decline, although US reliance on Middle East oil has often been exaggerated. Canada is a far more important supplier, and the US imports about as much from Africa as it does from the Middle East.

What does increased US oil production mean for its security commitments, particularly among GCC states? Most experts agree that Washington will not abandon the region, nor will it allow any other power to take on a preeminent role in securing the safety of oil and gas shipping through the Strait of Hormuz and worldwide.

As the senior Western oil executive put it, “Oil is a fungible commodity. It can be bought in many places. It doesn’t matter where it comes from. But security can still only be supplied by the United States, and they know that, and they also know that it gives them strategic leverage over China to do so.”

The IEA’s van der Hoeven notes that “OPEC oil will still very much be needed. This new supply does not spell the end of OPEC. The latter will remain an essential part of the oil mix for as long as we can tell. But in the medium term, OPEC production growth faces new challenges.”

Odeh Abdurdene, a specialist on global energy markets, noted in a report for the Atlantic Council that “the Gulf oil producers are essential to world energy supplies and price stability, and Saudi Arabia will be the unrivaled power house of global production for the coming decades, especially if it uses natural gas and solar power to meet its domestic power needs.”

Most experts agreed that Saudi Arabia will retain its paramount position as the one oil state with meaningful spare capacity, and thus able to influence oil prices. Robin Mills agrees that it is essential for Saudi Arabia to use more natural gas for its power needs, because “it is wasteful to use oil for power stations.”

In summing up her remarks, van der Hoeven said: “North America has set off a supply shock that is sending ripples throughout the world.” Those ripples are making their way to the Middle East, but most analysts agree that they will likely remain ripples—not become a wave.