Eighteen years ago, a bunch of crazed religious activists, most of whom were from Saudi Arabia, hijacked four planes and attacked the US on its home soil. A frightened then enraged US snapped into action, and invaded the country next door. Several of them actually; both Iraq and Afghanistan received a fairly significant pounding from the finest military hardware available on the planet.
Saudi Arabia remained a bizarre oasis of calm; there may have been a few unpleasant diplomatic exchanges between the Americans and Saudis, but we never saw any evidence of discord. The reason for this screwball incongruity between US treatment of Saudi Arabia and its neighbours can be expressed mathematically: 260 billion barrels of proved reserves. In the pre-shale-revolution days, that was a very beguiling number to a country with a voracious appetite for oil and limited homegrown supplies.
Overarching this weird porcupine-like exterior of Saudi Arabia’s was the tacit acknowledgement that only a complete fool would attack the Saudis. It is probable that the US leveled Iraq because they feared that Iraq might attack other oil bearing states in the region (the legendary “We could have sworn we saw weapons of mass destruction” comedy skit). To all the world it appeared as though Saudi Arabia had a constant bodyguard with not only big muscles but lasers for eyes and pockets full of nuclear weapons.
Wow, how the world has changed. Several days ago, a Yemeni rebel group attacked SA’s two main oil facilities, knocking 5 million b/d off line in the biggest production-reduction attack possibly in history. Before the US shale revolution, the pentagon would have been scrambling fighter jets like hornets exiting a kicked nest at the first sign of action in the Middle East. But because of the shale revolution, and the weirdest president in US history by a considerable margin, we are now looking at a new world order.
Possibly the most shocking part of all this is how blasé the world seems about the drone attacks, precisely because of the shale revolution. A few decades ago, any sabre-rattling words between Middle Eastern neighbours would have sent oil up by 10 or 20 percent. Today, it took rebels knocking half of Saudi Arabia’s production off line to have the same price effect.
The reason is because the world has, through one of those miracles of communication, been mesmerized by tales of the infinite potential of US shale fields. We have a hundred years worth of reserves, pant-wettingly-enthusiastic producers tell anyone who will listen. Permian growth will grow by a million barrels per day for years to come, others say. New technological improvements will keep productivity growing by 5 percent a year in perpetuity, one analyst report calmly predicted.
What’s scary about all this is the depth of blind allegiance to these forecasts, much as the world has been hypnotized by climate alarmists. In both cases, to dispute the commonly accepted themes is to be marginalized as a crank. Shale deniers, climate deniers, all the same thing – only a fool doesn’t accept the science!
The US is now indeed a huge exporter of oil, and that has happened quickly. But context as always is important, even if it is largely ignored.
The US has become an oil production powerhouse largely on the back of a single field, the Permian, although others such as the Bakken contribute a lot of shale output as well. But the Permian is the golden giant upon whose shoulders the entire foreign affairs program seems to be resting.
The US now acts as though other oil producing nations hardly matter. They are quite content with blocking Iran’s oil production, and watching SA’s largest fields get shut in without the historically-expected bombardment of whomever might have been responsible.
For those who pay closer attention to US shale production, this is an ominous gamble indeed. Schlumberger – one of the leading frackers – and indeed some of the producers themselves have been talking about the issue of parent-child wells (wells have been drilled closer and closer together in sweet spots to maximize recoveries, but communication between these wells is hinting at limits to development potential). Other drillers have been mentioning for the first time ever the inevitable fact that “Tier 1” acreage is being exhausted, and in the years to come well quality is most likely to go down and possibly substantially. The treadmill will get faster; more (and longer) wells will be required to offset declines, never mind grow production. Already producers spend a majority of their cash flow to keep production flat, and this problem will get worse (unless oil prices skyrocket).
It is hard to say how Permian growth will continue; there are many signs now that it will become much more challenging (not even getting into the New Mexico side of the Permian, where a new-ish Democratic governor with a hatred for fossil fuels is biting at the legs of producers on that side of the border). At the same time, the US is apparently adopting a foreign relations framework, and incredibly a domestic economic one as well, predicated on the assumption that the US’ still-growing petroleum demands can be met in house.
That is a lot of weight on the Permian, and whatever other lesser sidekicks are pitching in. Higher oil prices will help boost production, but there is a considerable chance that this strategy of relying largely on the hype surrounding one (albeit) gigantic field is going to not work out very well. For someone with the strategic impulses of Donald Trump, that may not matter, but for the rest of the world it might get very interesting indeed. For years the Permian surprised only to the upside; today, many ominous signs indicate that the party might be if not over definitely slowing, just at the US’ reliance on it has never been higher.
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