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"The United States Is the Next Saudi Arabia of Energy."
Yes and no. American oil production, once thought to be in terminal decline, is up strongly for the first time in a quarter-century. Natural gas output, largely flat since the mid-1990s, has grown rapidly for the last five years. These trends look poised to continue, and observers are predicting major geopolitical consequences to follow. Ed Morse, an influential Citigroup analyst and former U.S. official, asserts, "North America is becoming the new Middle East." Robin West, another perceptive industry observer, predicts that by 2020, the United States will become the world's largest producer of oil and gas -- "the energy equivalent of the Berlin Wall coming down."
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These sorts of views are quickly becoming conventional wisdom. But it takes more than sheer volume of oil and gas production to dominate world energy markets.
No doubt, the renaissance in U.S. oil and gas is really happening, fueled by new technology and high oil prices. About a decade ago, innovators aggressively began to marry horizontal drilling, which allows producers to access large swaths of an underground resource from a single well, with hydraulic fracturing -- better known as fracking -- which uses high-pressure fluids to crack dense rock and allow oil and gas to flow. The combination has unlocked vast quantities of oil and gas buried in shale rock deep underground. Technology has also allowed producers to tap resources far beneath the sea in a way that wasn't possible before; just two years after the Deepwater Horizon oil spill in the Gulf of Mexico, offshore production has recovered, helping spur U.S. oil production upward.
It's no coincidence that these technologies have flourished amid record-high oil prices. Extreme offshore production makes little sense unless oil prices are above $50 or $60 a barrel. The economics of extracting oil from shale are murkier, but most think that $70 or $80 a barrel is necessary. Ten years ago, most analysts were projecting $20 crude for as far as the eye could see. In that world, the current boom would have been impossible. Oil prices have shifted decidedly higher, however, making new production possible along with them.
As a mere matter of scale, projections that the United States will reclaim the title of world's largest oil producer are entirely plausible, though hardly guaranteed. Saudi Arabia produces around 10 million barrels of crude oil each day, versus about 6 million for the United States. Surging production of natural gas liquids (NGLs) -- crude-like hydrocarbons produced alongside natural gas -- effectively takes that figure up to about 8 million barrels a day. Morse claims that total U.S. production could exceed 10 million daily barrels by 2015, and even the cautious U.S. Energy Information Administration (EIA) sees combined crude and NGLs production coming close to 10 million barrels a day by 2020.
But what makes Saudi Arabia such a dominant global player isn't merely the scale of its energy production. It's that it actively attempts to influence the price of oil and often does so for explicitly political reasons, whether currying favor with Washington or trying to hurt Tehran. By restraining long-term investment in oil production capacity -- manufacturing scarcity -- the desert kingdom is able to prop up the average price of crude. What's more, by keeping some of its production capacity in reserve, to be swung on and off the market at will, Saudi Arabia is able to moderate short-term price swings. It's not because they love the Saudi royal family that world leaders are so solicitous when they visit Riyadh.
Nothing about the U.S. oil and gas boom suggests that Washington can or will step into this role. No U.S. government would -- or could -- attempt to prop up world prices by restraining U.S. supplies. Besides, America's oil boom is being driven by supplies that cost huge sums of money to develop. Once new wells are drilled (at a cost of about $100 million each for offshore development), owners will produce flat out to recoup their investments; there's no way they'll leave untapped production capacity just waiting for a political crisis or global market swing.
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