The unsustainable status quo

Spearhead Analysis – 18.11.2014

By Enum Naseer
Senior Research Analyst,
Spearhead Research

OPECThe anxiety in the global economic and political circles is palpable and comes as an inevitable consequence of a world order that is nearing its expiry date. The global community is at a crossroads—this is the defining point: from here on, a new set of principles will most likely determine the global pecking order and international decorum for years to come. To date, the cost of US oil vulnerability to both the country and the world at large has been huge. The noneconomic cost, for the most part, has gone largely unrecognized: protecting and pampering oil-rich authoritarian regimes has come at the expense of human rights in the Arab world and has halted the journey towards the evolution and establishment of vernacular democracy contributing thus, to the chaos and civil strife that plagues the region today. However, as the US discovers the wealth of shale oil at home, it has a chance at seizing a unique window of opportunity to reconsider its foreign policy, much of which had previously been underpinned by dependence on foreign oil and caused irreversible damage to the world.

Latest estimates lead us to believe that by the end of the decade, the US will have exceeded oil-producing giants such as Saudi Arabia and Russia—this comes with the expectation that the new shale resources in North America and opening up of fields in the Arctic seas will help produce 14.2m barrels per day of oil and petroleum products by 2020 which is nearly double the amount produced in 2013 (7.5m bpd). With the litmus test for the unity between the OPEC countries just around the corner and their influence on the global oil market eroding with every passing day, there is a lot of speculation about the sustainability of the cartel in the long-term. Current events suggest that cooperation vis-à-vis the determination of an oil production ceiling will be difficult to muster: Saudi Arabia has made it clear that it has no intention of cutting down production on its own, guided mainly by its ambition to maintain its market share. While conscious non-action on part of Saudi Arabia may have potential benefits in terms of making the oil business less lucrative for the new entrant as prices continue to slip, there is the risk of resentment and dissent and possible rifts within the organization in such a scenario. For members such as Iran and Venezuela, that do not enjoy the luxury of a buffer in case of persisting bearish trends in the oil market, the cost of oil production is comparatively greater than that for the kingdom.

Having said that, it is also important not to be completely swayed by an overly optimistic attitude towards the impact that the shale oil boom will have on the US economy. The oil market is both complex and dynamic and rushing to judgments based merely on cues will keep stakeholders from recognizing possible pitfalls and in turn impede the ability to anticipate and prepare for undesirable outcomes. It is essential, thus, to entertain the possibility of an anticlimactic twist to this tale of hydrocarbon revolution as well given that the debt-ridden oil sector is looking to take the OPEC head-on. As it is, much is being said about the perils of turning a blind eye to the likelihood of the shale oil ‘bubble’ bursting given that comparisons are being made between the housing sector scandal and the shale oil boom. With the global financial markets still reeling from the impact of the housing sector scandal, there is reason to proceed with caution. Moreover, the economic and environmental costs of hydraulic fracking have sparked a new debate that has provided the incentive to both explore cheaper and cleaner alternative methods of exploitation and investigate the seismic link between the use of fracking technology and the occurrence of earthquakes. The stakes are high and serious thought and deliberation is needed to make headway.

While there is no denying that US energy self-sufficiency will help reduce the vulnerability that has not only held the country’s foreign and economic policy hostage but has taken a toll on global peace, progress and prosperity, there are still quite a few hurdles the country has to overcome. However, it is important to realize that a well-timed policy revamp today with a view to increase collaboration on goals geared towards ensuring world stability and development can help all stakeholders reap long-term sociopolitical and economic benefits. Irrespective of how the situation plays out, it can be said without a doubt that oil is still a ‘strategic commodity’ and will continue to determine the fate of nations. The age of black gold is far from over—the days of the old status quo, on the other hand, in the wake of shrinking clout of the OPEC are definitely numbered.