Secretary of Defense Ashton Carter ruffled feathers this week when, in a February 2nd speech at the Economic Club of Washington D.C., he demoted ISIS and terrorism, to the bottom of a list of key threats to America’s national security. At the top of the list of “five evolving challenges”? Russia.
The entire geopolitical landscape is tilted by the prospect of oil prices staying low for a long time and draining money away from oligarchs and meddlers that have interests often antithetical to America’s.
Right now, though, odds are that Vladimir Putin is more worried about what oilmen like Harold Hamm are thinking than what’s on the SecDef’s mind. Hamm, founder and CEO of Continental Resources, is one of the more outspoken amongst the multitude of shale pioneers who are collectively responsible for the global oil glut — and the consequent price collapse.
We can see what specifically must worry Putin in a new must-read interview with Hamm (courtesy of Christopher Helman at Forbes). Hamm, referencing the fact that American shale producers have in the past half-dozen years nearly doubled America’s oil output, says: “We can double it again.” If Hamm is correct, then the shale fields alone—never mind the rest of America’s onshore and offshore production—would be producing more oil than Russia, and the world markets would again be in oversupply.
That oil is a vital global commodity is without dispute. It is central to global trade and transportation with simply no viable alternative available at any price any time in the foreseeable future. The biggest wildcard in geopolitics right now? The future price of a barrel. That will determine not just how fast and how much more oil will come from America’s shale, but also the future profits for every global producer. And of course profits from oil sales fuel the domestic and extra-territorial ambitions of the world’s petrostates.
For Russia, almost three-fourths of all export revenues and over half its national budget comes from selling oil & gas. The problem is that, according to the World Bank, Russia needs oil at $100 per barrel to balance its domestic budget and fund its military and foreign ambitions. It’s expensive to buy modern weapons, including the missiles Russia has deployed across the NATO frontier. And it’s expensive to meddle in foreign nations whether by deploying troops in the Ukraine and Syria, or funneling “gray” money to bad actors from Africa to South America.
Russia is not alone. With only a couple of exceptions, OPEC’s members all need for oil to sell anywhere from $80 to $150 per barrel to support their domestic and foreign spending. Iran is betting on its future growth coming from oil exports. And ISIS, as has been widely reported, funds its fighters and terrorists with sales from captured oil fields.
With only a couple of exceptions, OPEC’s members all need for oil to sell anywhere from $80 to $150 per barrel to support their domestic and foreign spending.
Now the entire geopolitical landscape is tilted by the prospect of oil prices staying low for a long time and draining money away from oligarchs and meddlers that have interests often antithetical to America’s. But in due course prices will rebound. Oil is, after all, a cyclical commodity.
The issue of how long prices stay low is of urgent relevance to private-sector companies that are trying to balance the books and ride out the bottom of the cycle. But the rub for Russia, and OPEC, is that when prices do creep back up, they will unleash another American gusher.
The key question for nation-state oil exporters like Russia: What price will cause the Harold Hamms of America to rush back into drilling and unleash a Shale 2.0 boom? Regardless of the belt-tightening, bankruptcies and consolidations rolling through the U.S. shale ecosystem, the physical resources, infrastructure, experience and intellectual property don’t evaporate, though they may end up with new owners.
Some analysts believe that once prices move north of $40 a barrel the shale resurgence will start; others think it will take at least $50 to make it happen. No one disputes that $70 would feel like Mardi Gras time again from North Dakota and Colorado, to Oklahoma and Texas. The futures market, which reflects today’s trader and investor sentiments, doesn’t foresee $50 for several years yet. That’s a very big problem for Russia and OPEC because even $50 to $70 is a long way below $100.
The minute that private sector investors and oil companies are convinced that oil prices are on the way towards just $50 or so, they will unleash hundreds of billions of dollars in investment capital now standing idle. There is every reason to believe that renewed drilling will lead to production growing at least as fast as the astonishing pace of the past half-decade. It is worth remembering that the shale revolution began when oil was less than $50 per barrel, and employed technologies far less efficient than those now available.
The new world for oil looks very different from the past, with geopolitical implications yet to be felt. It is a world in which oil stays cheap, in which price spikes are embraced and then crushed by high-velocity increases in shale production, and one in which new supply increasingly comes from ever-improving technology deployed by thousands of entrepreneurs making high-velocity decisions on American soil.
The minute that private sector investors and oil companies are convinced that oil prices are on the way towards just $50 or so, they will unleash hundreds of billions of dollars in investment capital now standing idle.
Putin, and leaders in other similar petrostates, doubtless understand the new dynamic. Like so many other aspects of geopolitics though, the outcomes are not easily predicted. Although the United States benefits in many ways, unintended and unpleasant consequences will doubtless emerge. All of this argues for a sober assessment, not one based on wishful thinking about some fictional future where oil is less important; but one reflecting an understanding of the new landscape by analysts in the State and Defense Departments, intelligence agencies, and not least Congress.
Energy policy in recent years has been over-focused on finding alternatives to oil, instead of dealing with the realities of an increasingly dangerous world. For an excellent overview of today’s geopolitical complexities, and why they matter so much, I recommend “Oil and World Power,” (published in the latest The New Atlantis magazine), an essay from Lee Lane, a visiting fellow at the Hudson Institute. While Lane and I may disagree on just how quickly and expansively Shale 2.0 will happen (though I’d put my money on Harold Hamm’s view), we are on the same page when he suggests a “need to develop a more realistic concept of U.S. national interest.” He is in good company: we have recently heard similar admonitions from former Defense Secretary Leon Panetta and former Secretary of State Henry Kissinger.
Following Secretary Ashton’s rhetorical call to arms, we now have the New York Times editorial board agreeing with the SecDef that “deterring Russia is essential.” Perhaps the Times in calling for alternatives to “big wars” and “costly weapons” in dealing with our adversaries, might come to appreciate that America’s new petroleum power presents a once-in-a-lifetime opportunity.
This piece originally appeared in Forbes