How American Fracking Changes the World

Tue, November 27, 2018

Until recently, observers expected American energy production to reach a plateau. A lack of pipeline capacity was expected to constrain output in the Permian Basin through 2020. Instead, shippers found ways to use existing pipelines more efficiently, and new pipelines were constructed faster than expected. U.S. crude-oil production is expected to average 12.1 million barrels a day in 2019, 28% higher than in 2017. Surging production has roiled world energy markets.

The biggest loser is Iran. Shale has been pummeling Tehran for some time. The economic benefits Iran hoped to gain from President Obama’s nuclear deal were largely offset by the sharp 2016 fall in the price of oil. Now the pesky Permian is blighting Iranian hopes again. Rising American output made it easier for the U.S. to slap tough sanctions on Iran without risking a sharp rise in world energy prices. Low prices also reduce Iran’s income from the oil it still manages to sell.

The next biggest loser is Russia. Oil is a key revenue source for the Kremlin. But the shale boom doesn’t only pick Vladimir Putin’s pocket; it also attacks his foreign-policy strategy.

Russia wants to control the world oil price and use that power to boost its diplomatic weight. Mr. Putin has two ways to influence the price of oil. The first is to increase geopolitical tensions. If threatening Ukraine or bombing Syria spooks traders and jacks up energy prices, Russia has a better hand in negotiations with Europe and the U.S.

Mr. Putin’s second option is to cooperate with the Organization of the Petroleum Exporting Countries on price fixing. Building a closer relationship with Saudi Arabia over their common interest in inflated oil prices might loosen the kingdom’s U.S. ties and generate lucrative commercial and arms deals for the Kremlin.

Shale disrupts both approaches. With supplies relatively abundant, energy markets can shrug off geopolitical shocks. The surge of American oil and gas also reduces the benefits of OPEC-Russia cooperation for both sides. Russia and OPEC can raise prices by reducing output, but that makes new drilling projects more profitable for American frackers. Cutting prices to starve the competition also doesn’t work. Thanks to past pressure from OPEC and the innovation it forced on the industry, many wells in West Texas now break even at an oil price of $30 a barrel. That’s not a price Russia can accept.

America’s latest shale success is also bad news for the Gulf sheikhdoms. As their incomes fall, their control over the world’s oil price diminishes, as does their ability to fund global Islamic movements. Meanwhile, their importance to the U.S. gradually declines while their military dependence on the U.S. and even Israel grows.

Closer to home, falling energy prices from the shale surge also strengthen America’s hand. The pressure on Venezuela, a major oil producer, increases. The troubled Central American countries sending migrants to the U.S., energy consumers all, get an economic reprieve. Mexico may be pressured to pursue more business-friendly economic policies. More than a sixth of the Mexican government’s revenue comes from energy; falling prices will force the incoming government to find ways to attract more foreign capital.

Europe, too, benefits from low energy prices. They are a relief in particular to French President Emmanuel Macron, whose government faced violent protests over the weekend over fuel taxes. Falling prices also offer relief to Italy. They might help Rome and Brussels reach a fiscal compromise.

Shale power is not, however, an unalloyed good for the U.S. China’s energy-intensive manufacturing economy benefits substantially when energy prices fall. In a world with low prices, Beijing is in a better position to ride out a trade war. Recep Tayyip Erdogan’s Turkey also benefits both from low prices and the weakness of its Middle Eastern neighbors.

Ever since the shale boom began, diplomats and politicians have underestimated its importance. The U.S. has regained the position it lost in 1973 as the world’s largest oil producer, which it will likely hold through at least the 2040s. The consequences for energy markets and world politics will be far-reaching. Roughnecks in the American Southwest are doing more than most foreign ministries to change the world.

But the shale revolution isn’t only an energy revolution; it’s a technology revolution, enabled by advanced methods for oil prospecting and extraction. From the transistor to satellites, to the personal computer to the internet and now shale, it is America’s innovation—as much as its hard power and diplomacy—that shapes world politics.