The world’s energy axis is shifting as we write. Global oil and gasoline prices dropped in October 2014 to 17-month lows. Saudi Arabia cut the price of its benchmark Arab Light oil to the lowest point since December 2008. Russia’s oil production is approaching post-Soviet highs. Libya’s production is now recovering; Europe’s demand is anemic given the weak economy; and Chinese demand for oil is up only 2% from last year (less than expected).
On the home front, the US is further pushing this energy shift. Consider this: North Dakota is now producing more oil than Libya. In the US, Citigroup dropped its oil price forecasts for the final quarter of 2014 by 10%. The major driver for this change is the boom in US oil and gas production, which has also dramatically decreased US energy imports. As a result, nations that have long exported oil to the US have been forced to find new markets – and in many cases – to significantly lower their prices to be competitive. Many analysts believe that this dynamic will significantly impact exporters’ economies. “Most energy-producing states that lack diversified economies, such as Russia and Iran, will lose out, whereas energy consumers, such as China, India, and other Asian states, stand to gain,” according to Robert Blackwell and Meghan O’Sullivan in Foreign Affairs.
Yet, the US is currently forbidden from fully participating in the global crude oil markets. For 39 years, the export of US crude has been illegal due to an outdated ban. What would happen if we lifted the ban and unleashed America’s energy to the world? Not only would we experience economic benefits at home, the influx of oil to the global market would stabilize global oil prices.
The tumultuous world energy market needs a reliable source of oil that is not tied to OPEC or Russia. It’s time to take the lead in the crusade by lifting the US crude oil export ban. It’s time to reclaim our role as an energy superpower.
Thankfully, cracks in the export wall are beginning to appear. The Obama Administration, for example, has already loosened the export ban on small amounts of petroleum condensate and exports crude oil to energy ally Canada. And another portent was visible at the end of September, when supermajor Conoco shipped the first cargo of Alaska North Slope crude to Asia in more than 10 years. “It was the first in what Citigroup’s head of global commodities research, Edward Morse, says will ‘become an armada’ of about 100,000 barrels a day. The industry is also increasing pressure on the Obama administration to allow oil exports from ports along the Gulf of Mexico,“ The Washington Post reported.
The American Oil Armada
The rest of the world is already sensing profound changes in how petroleum energy is produced, exported, and circulated. As American shale production increases and global oil prices slip, the Organization of Petroleum Exporting Countries (OPEC), for one, is seeing its pricing hegemony challenged as oil production increases among non-OPEC competitors.
OPEC historically has had a lock on global oil prices because of its vast reserves and ability to control production and exports. In the last five years, for example, OPEC has either shaved or increased oil production to maintain global prices in a stable, albeit “high” range of $90 – $110 per barrel. But now with booming North and South American petroleum production, along with a 50% decrease in crude imports to the US, the US Energy Information Agency (EIA) projects that America will pump more than 3 million barrels of new petroleum and other liquid fuels per day between 2012 and 2020 – principally from light tight oil. Together with expected increases of supply from Iraq, Canada, South America, Mexico, and Australia, among other nations, the global price of oil could fall by as much as 20%.
Plummeting prices and global glut could mean that OPEC will face mounting dissent in its ranks, especially among nations requiring higher oil prices and production to maintain struggling economies (e.g., Venezuela, Iraq, West African nations). Both OPEC and non-OPEC producers would feel the pinch. The countries likely to suffer from an oil glut include Indonesia and Vietnam in Asia; Kazakhstan and Russia in Eurasia; Colombia, Mexico, and Venezuela in Latin America; Angola and Nigeria in Africa; and Iran, Iraq, and Saudi Arabia in the Middle East, according to Blackwell and O’Sullivan.
These fears are beginning to dominate discussions in the Middle East. In September, for example, Iranian Oil Minister Bijan Namdar Zangeneh – who continues to cope with international sanctions because of his country’s refusal to restrict its nuclear program – called on OPEC to offset production to keep oil prices from falling any further. OPEC actually cut production by 400,000 barrels per day in August to accommodate growing global supplies and may do so again. But if prices continue to drop, “swing producer” Saudi Arabia may not be able to control world supply – or pricing – simply by cutting production.
If the US lifts its crude export ban, control of global supply will become much more diffuse, especially among non-OPEC nations. According to a recent Brookings Institution study, US crude exports would result in “the establishment of secure supply relationships between American producers and foreign consumers, increasing the flexibility to export crude…to address disruptions; empowering another non-OPEC nation to meet the growing energy demands from countries in Asia; and providing our own hemisphere with a competitive source of crude supply.” Ironically, the Brookings report does not affirm that growing US shale production would materially affect the “calculus” of OPEC’s behavior, especially in the long-run – although its assertions described above, based on economic data and projections, would suggest otherwise. The Obama Administration is looking closely at the geopolitical impacts of lifting the ban – especially in light of the shale energy boom and Russia’s aggression in Ukraine and Crimea. (A discussion specific to the Ukraine follows in our subsequent post, “Enough Shameful Reluctance, Congress: Let’s Step Up and Help Our Allies.”)
The Energy Flow Moves from West to East
One thing is certain, though: The combination of North American petroleum abundance and weakening consumption worldwide is reversing the physical circulation of oil exports. Much more oil will be exported west to east, both from the Persian Gulf and Africa to Asia, and potentially, from the Western hemisphere to Asia and possibly Europe.
For decades, oil flowed abundantly from the Persian Gulf and other producing regions (e.g., Central Asia, Indonesia, Africa, Russia) toward the West, especially Europe and North America. Tankers are already moving east and likely will continue. According to energy security analyst Sarah Emerson of ESAI, Inc., “Tanker traffic to the East could rise by more than 700 tankers by 2025 even as the flow to the West drops significantly.”
Emerson identifies multiple trends pointing toward a further shift east:
- Shale and oil sands growth in North America is reducing crude imports to the US, especially as most crude exports from the US are currently banned – although refined products based on US crude are doing brisk business worldwide.
- Energy reform is under way in Mexico, leading to some foreign investment in Mexico’s oil sector and an eventual recovery in Mexico’s crude oil production, particularly in shale and offshore.
- Oil demand is declining in Europe with its emphasis on renewables and more natural gas.
- The US is reducing coal and oil consumption with conservation and stricter vehicle fuel economy standards.
- Natural gas consumption will increase in North America, the Middle East, and Asia; abundant liquefied natural gas (LNG) exports will come from the US, Russia, and other countries toward the East;
- Light tight oil production in the US has all but eliminated imports from Africa, whose producers are now shipping their petroleum east to Asia.
- New or expanded refinery capacity in the Middle East, Asia, and Latin America is, and will continue to, contribute to the redirection of crude oil flows.
- Continuing growth in Asia will support imports there even as US and European imports fall.
A US Seat at the Table?
Asia remains the wildcard in the export/import picture. One question is how much energy Asia can absorb from producing countries of Africa, Latin America, and the Middle East now that the US is becoming much more energy self-sufficient.
Russia is attempting to answer this question, aggressively wooing the Asian market (especially China). But both the US and Canada can begin to capture the Asian (and presumably, European) markets by expanding and enhancing pipeline infrastructure to shipping facilities on the West Coast. Emerson estimates that a volume of about 400,000 b/d will be routinely exported beyond the US by 2025 – assuming export bans are lifted. “If all pipelines are built and fully operational, that number could be higher, but would require significantly faster development of the oil sands in the meantime,” she wrote.
It’s time to seize opportunities like this and show the world that we are still a decisive and strong nation, able to move quickly on the world stage. This means acting on a repeal of the archaic crude export ban. Such a move will not only strengthen our influence in the world market; it will also ensure our place at the table among global energy leaders.
