Geopolitical Shocks from Fracking

 

Hydro-Fracking-FieldTechnology is great — we all know that. It has given us longer and far more comfortable lives, and enormous increases in wealth of all kinds. Nevertheless, we often make arguments about geopolitics as if we were in a technological stasis field. This is a mistake, because, of course, technological changes lead to unintended consequences that can change everything.

I am speaking specifically not about incremental technological changes (like better cars or air conditioning), but about disruptive changes — the kinds of things that lead to changes that the inventors never imagined.

One of my recent hobby horses is fracking. People think that it is about cheap energy, which it is. And they think it is an environmental nightmare, which is not so. Fracking in the U.S. has brought down (and will hold down) energy prices. But the geopolitical implications are staggering — and broadly unrecognized.

Right now, the U.S. is Fracking Central. But Europe, China and Africa… well, just about everywhere has deposits that will make them energy independent for the equivalent of between $30 and $60 a barrel.

Here is my stab at what it will mean:

Gulf States will suffer, maybe to the point of revolution. Saudi Arabia is full of people who are generally incapable, but have lived on oil revenue. What happens when the revenue is not there?

China will become energy independent. This might render their geographic ambitions (like on the Spratly Islands) moot. Why invest if you don’t need the oil? Or the increased security may deliver precisely the opposite effect — less insecurity may mean MORE aggressiveness on the world stage. I don’t know which is more likely. Do you?

Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers. Already every Russian who can has fled, taking all the assets that can be moved. Is Russia going to become the new Wild West?

All water shortages near oceans can cease. With cheap energy comes very cheap desalinized water, using the same technology Israel uses to deliver water at 0.2 cents per gallon. The only shortages will be in places without law and order, or places where politicians want to make people feel guilty for living (California). We often underestimate the impact of technology on society, and to our peril.

Fracking is an inherently wildcatter kind of operation, making it possible for increasingly grey- and even black-market oil and gas to be produced. It is, possibly, something of an anti-crony capitalism technology (which one can see by how poorly the industry sells it to politicians). These wells are cheap and fast — nothing like the multibillion-dollar offshore rigs that require enormous investment in plants, people, and politicians. It may actually help promote freedom worldwide. It is hard to control wildcatters in rural China or Russia from Beijing or Moscow.

The thing with disruptive technologies is that the results are unpredictable. So these predictions may all be wrong. I think it is pretty safe to say, however, that foreign policy analysts have not been giving this technological revolution sufficient consideration.

Do you agree?

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  1. Lucy Pevensie Inactive
    Lucy Pevensie
    @LucyPevensie

    iWe:

    2: China will become energy independent. This might render their geographic ambitions (like on the Spratly Islands) moot. Why invest if you don’t need the oil? Or the increased security may deliver precisely the opposite effect – less insecurity may mean MORE aggressiveness on the world stage. I don’t know which is more likely. Do you?

    I can’t say that I know for certain, but I would be willing to wager a small amount that China will become more aggressive, rather than less so.  China has always seen itself as the rightful ruler of a lot more territory than it currently controls, and I see no reason to imagine that that would be changed by increased wealth.

    • #1
  2. TG Thatcher
    TG
    @TG

    Agree

    • #2
  3. user_216080 Thatcher
    user_216080
    @DougKimball

    iWe,

    Let me refer you to something I wrote when this site was in its fledgling stage some years ago.  Sometimes I surprise myself.

    Look here.

    DK

    • #3
  4. Ricochet Member
    Ricochet
    @MattBalzer

    Taking the points in order:

    1. If the Saudis are largely incapable, it should be interesting to watch…except for the part where it drags the rest of the ME along with it. I’m going with “they probably won’t break up so long as Iran is a threat”.

    2. I would expect increased energy independence to lead to more economic prosperity and a general decrease in aggressiveness…but in China, who knows if that’s the case?

    3. I agree, although there might also be something akin to 1, where the Russians focus on an external enemy.

    4. Sounds about right, although I’d have to read up on the Israeli system because I expect that there are more places in the California category than we’d think. If it can be scaled down, we might see something similar to #5 with black market water.

    5. Where are the rogue wildcatters coming from? Are they Chinese or Russian nationals, or are there teams of black ops wildcatters sneaking across the borders? That would make for a good Tom Clancy-style novel plot, I think: the story of a team of wildcats who sneak into Russia to find oil.

    • #4
  5. Seawriter Contributor
    Seawriter
    @Seawriter

    iWe: 2: China will become energy independent. This might render their geographic ambitions (like on the Spratly Islands) moot. Why invest if you don’t need the oil? Or the increased security may deliver precisely the opposite effect – less insecurity may mean MORE aggressiveness on the world stage. I don’t know which is more likely. Do you?

    Uhhh . . .  not necessarily.

    While China has a lot of oil shale formations, they may not be able to extract it. So far, efforts to get oil and gas out of shale formations outside the United States have failed miserably.

    One of the main reasons is the US is almost unique in granting mineral rights to private land owners.  Owning mineral rights makes drilling on you land a source of income, and puts the landowners on the side of the drillers.

    In most countries (including UK, Germany, and China) mineral rights belong to the crown (or government) making drilling a nuisance with no compensating gain to landowners – who oppose it as a result.

    Additionally, fracking/directional drilling is as much art as science, with experienced workers playing a big role in its success.  It took 20+ years to develop the know-how to drill shale formations profitably, and transferring that knowledge overseas seems difficult.

    It may be only countries like the US and Canada may be able to successfully exploit shale.

    Seawriter

    • #5
  6. user_105642 Member
    user_105642
    @DavidFoster

    Right now, the US is Fracking Central. But Europe and China and Africa… well, just about everywhere has deposits that will make them energy independent for the equivalent of between $30 and $60 a barrel.”

    In most of Europe, the cultural suicide instinct, combined with the nature of their mineral rights laws, will prevent significant fracking.  China, if they have the right rock formations, will eventually get it done.  Africa, I’m not sure…one needs railroads or at least decent roads for equipment/sand delivery, and railroads or pipelines to carry the product away.

    • #6
  7. Mike H Coolidge
    Mike H
    @MikeH

    I think most people imagine a Middle Eastern revolution as a good thing since they’ve been a thorn at our side for such a long time, but in case that’s anyone’s reaction I caution that instability rarely produces predictable or desirable outcomes.

    • #7
  8. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    iWe: Nevertheless, we often make arguments about geopolitics as if we were in a technological stasis field.

    What’s this “we” business?Plenty of folk look at technological change through a geopolitical lens. Just look at how cell phone technology is transforming much of the developing world.

    • #8
  9. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    iWe: 3: Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers. Already every Russian who can has fled, taking all the assets that can be moved. Is Russia going to become the new Wild West?

    Nazi Germany was toast because it didn’t have any oil.

    I wager that if Russia can’t find export customers for its oil and gas, the Russian military will be more than happy to find uses for their surplus fuel…

    • #9
  10. iWc Coolidge
    iWc
    @iWe

    Seawriter: In most countries (including UK, Germany, and China) mineral rights belong to the crown (or government) making drilling a nuisance with no compensating gain to landowners – who oppose it as a result.Additionally, fracking/directional drilling is as much art as science, with experienced workers playing a big role in its success. It took 20+ years to develop the know-how to drill shale formations profitably, and transferring that knowledge overseas seems difficult.

    It may be only countries like the US and Canada may be able to successfully exploit shale.

    Seawriter

    It sounds unlikely to my ears, but I guess it is possible. China may not have private property the way we do, but local governments certainly see many opportunities for maximizing their revenue.

    If you were the Chinese government and wanted to increase oil supplies, wouldn’t you offer megabucks to US teams to come and do a series of “show and tell” mines? I’d be surprised if there were not already doing it.

    • #10
  11. iWc Coolidge
    iWc
    @iWe

    david foster:“

    In most of Europe, the cultural suicide instinct, combined with the nature of their mineral rights laws, will prevent significant fracking.

    Could be. I think one or more countries will “cheat” – probably more in New Europe than Old Europe. Then the dam will break.

    • #11
  12. iWc Coolidge
    iWc
    @iWe

    Misthiocracy:

    iWe: Nevertheless, we often make arguments about geopolitics as if we were in a technological stasis field.

    What’s this “we” business?Plenty of folk look at technological change through a geopolitical lens. Just look at how cell phone technology is transforming much of the developing world.

    This is the “sexy” area of high tech – things like social media software. I am interested in the much more substantive brass tacks of the world like oil and steel and energy and transportation and concrete. These are often ignored by people who think revolutions happen with “high” technology.

    Fracking is very high tech, but not in the way people think.

    • #12
  13. iWc Coolidge
    iWc
    @iWe

    Misthiocracy:

    iWe: 3: Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers.

    I wager that if Russia can’t find export customers for its oil and gas, the Russian military will be more than happy to find uses for their surplus fuel…

    That is a risk. But a military runs on more than fuel, and Russia is short a great many things. They cannot sustain much aggression.

    I fear the nuclear arsenal more. I still think a desperate blackmail attempt may be in our future at some point.

    • #13
  14. Ricochet Member
    Ricochet
    @Manny

    I don’t know whether to agree or not.  Is fracking revolutionary?  Possibly but it’s a refinement of a process, which wouldn’t make it so.  You certainly have given me something to think about.

    What I really think it means is that we should toss off wind and solar technologies.  Waste of money.

    • #14
  15. iWc Coolidge
    iWc
    @iWe

    Manny:I don’t know whether to agree or not. Is fracking revolutionary? Possibly but it’s a refinement of a process, which wouldn’t make it so. You certainly have given me something to think about.

    The result tells us that it is revolutionary. Technology development is not linear, and fracking ran over the tipping point from curiosity to national energy linchpin.

    What I really think it means is that we should toss off wind and solar technologies. Waste of money.

    I am in complete agreement, and always have been. The numbers do not work for either as a source of electrical power, and they never will. (Solar does hot water quite well).

    • #15
  16. Mendel Inactive
    Mendel
    @Mendel

    To play the devil’s advocate, shouldn’t there be a downside here somewhere? I believe most of us subscribe to the blanket axioms that there’s no such thing as a free lunch and that scientific advances are never 100% beneficial.

    Obviously global warmers see plenty of downside, but what about those of us skeptical of AGW? I have a hard time buying that there is nothing but upside to fracking – even if the benefits clearly outweigh the costs.

    • #16
  17. Mendel Inactive
    Mendel
    @Mendel

    Manny:I don’t know whether to agree or not. Is fracking revolutionary? Possibly but it’s a refinement of a process, which wouldn’t make it so. You certainly have given me something to think about.

    To add to iWe’s comment, almost every scientific advance with revolutionary effects is based on a merely “incremental” discovery when one looks at how the sausage actually got made.

    That has certainly been the case with the biomedical revolution of the last several decades. Each “breakthrough” was really the endpoint of millions of small steps, very few of which could be viewed as true leaps.

    • #17
  18. iWc Coolidge
    iWc
    @iWe

    Mendel:To play the devil’s advocate, shouldn’t there be a downside here somewhere? I believe most of us subscribe to the blanket axioms that there’s no such thing as a free lunch and that scientific advances are never 100% beneficial.

    Obviously global warmers see plenty of downside, but what about those of us skeptical of AGW? I have a hard time buying that there is nothing but upside to fracking – even if the benefits clearly outweigh the costs.

    The downside, to my mind, is what people will choose to do with the cheaper energy. If fracking makes China more territorially aggressive, this technology could be a cause of a land war in Asia.  If Saudi Arabia collapses and ISIS solidifies control over the Gulf, then the downside could be enormous.

    • #18
  19. Mendel Inactive
    Mendel
    @Mendel

    iWe:

    Mendel:

    If Saudi Arabia collapses and ISIS solidifies control over the Gulf, then the downside could be enormous.

    That makes sense; although to my mind, countries whose economies are primarily supported by mineral extraction (as opposed to human capital-intensive enterprises) are breeding grounds for some of the worst behavior on the planet (such as the Saudi royalty rich from unearned oil cash who funded 9/11). I recognize that even those countries often provide needed local stability, but it would be difficult for me to shed a tear if the kingdom of Saudi Arabia were overrun by barbarians.

    • #19
  20. Mendel Inactive
    Mendel
    @Mendel

    On a different note: in the developed world, one advantage of fracking seems to be the ability for dispersed production – each well (?) being run by an individual/small business.

    But given the fluctuation in oil price, and therefore the high risk likely associated with fracking on such a small scale, fracking seems like it could be similar to family farming. And those risks associated with family farming have saddled us with horrible farm subsidies which are nearly impossible to repeal.

    Do you see a similar danger with fracking? Can it be avoided through private-sector insurance/risk mitigation schemes before too many individuals take the plunge?

    • #20
  21. Ricochet Moderator
    Ricochet
    @OmegaPaladin

    One side benefit of fracking is that it makes us much more resilient in case of harsh winters, global cooling, or even to an extent global warming.  There’s really no downside to having a large energy supply, especially since energy is readily convertible from motor fuel to power station fuel.

    I follow nuclear like you follow fracking, iWe.  It’s another technology where the US has an edge – China uses mostly US-designed reactors, and we have a vast amount of experience with LWRs.

    • #21
  22. Seawriter Contributor
    Seawriter
    @Seawriter

    iWe:It sounds unlikely to my ears, but I guess it is possible. China may not have private property the way we do, but local governments certainly see many opportunities for maximizing their revenue.

    If you were the Chinese government and wanted to increase oil supplies, wouldn’t you offer megabucks to US teams to come and do a series of “show and tell” mines? I’d be surprised if there were not already doing it.

    The Chinese are already trying to get US teams to show them how to do fracking and failing. I am not saying they will not succeed, but to date they have not been able to frack economically.

    The problem for China is the technology is not standing still. A few years back fracked oil cost $100/barrel. Today (in the US) it is $40-50, and heading for $20/bbl. If China is five to ten years behind the US, it may mean they cannot extract for cheaper than the world oil price (because their price-per-barrel is the higher US production cost of a decade earlier) and they lose money on every barrel vs. buying it on the open market.

    What may have to happen is for the fracking technology to mature for a decade or so, so they catch up. But that could take 30 or 40 years.

    Seawriter

    • #22
  23. Roberto Member
    Roberto
    @Roberto

    iWe:3: Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers.

    European dependence on Russian energy production is a deliberate policy choice. This will not be changing regardless of whatever natural resources are available to them, note how France and Germany have both enacted bans on fracking. Their hyper-environmentalist scruples rank higher than any qualms they may have with regards to being resource dependent on the Russians.

    Nations such as Poland which are far more concerned about Russia have had little success with fracking despite significant efforts made in this area. One should expect European dependence on Russian energy production to continue indefinitely.

    • #23
  24. iWc Coolidge
    iWc
    @iWe

    Seawriter: The problem for China is the technology is not standing still. A few years back fracked oil cost $100/barrel. Today (in the US) it is $40-50, and heading for $20/bbl. If China is five to ten years behind the US, it may mean they cannot extract for cheaper than the world oil price (because their price-per-barrel is the higher US production cost of a decade earlier) and they lose money on every barrel vs. buying it on the open market.What may have to happen is for the fracking technology to mature for a decade or so, so they catch up. But that could take 30 or 40 years.

    Isn’t this a Comparative Advantage issue? The Chinese don’t need to do it as well as the US at, say, $50 a barrel. They don’t even need to match the seaborne price of $60 a barrel. They just need to do it well enough to exert leverage on would-be suppliers to get special deals.  Arguably, the Saudis would cut a deal at some discount to the world market  if it meant the Chinese were delayed in gaining energy independence.

    • #24
  25. iWc Coolidge
    iWc
    @iWe

    Roberto:

    iWe:3: Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers.

    European dependence on Russian energy production is a deliberate policy choice.

    The policy choice is to be green – not to depend on Russia.

    This will not be changing regardless of whatever natural resources are available to them, note how France and Germany have both enacted bans on fracking. Their hyper-environmentalist scruples rank higher than any qualms they may have with regards to being resource dependent on the Russians.

    This may well be true, which is why I reckon New Europe will come first. The UK may also lead the way.

    Nations such as Poland which are far more concerned about Russia have had little success with fracking despite significant efforts made in this area. One should expect European dependence on Russian energy production to continue indefinitely.

    I think the results will be non-linear, as they were in the US. A point will be reached when they “get it”. And then the floodgates will open.

    I would wager that fracking will be successful in Europe. It might take months or years, but it will happen.

    • #25
  26. Seawriter Contributor
    Seawriter
    @Seawriter

    iWe:Isn’t this a Comparative Advantage issue? The Chinese don’t need to do it as well as the US at, say, $50 a barrel. They don’t even need to match the seaborne price of $60 a barrel. They just need to do it well enough to exert leverage on would-be suppliers to get special deals. Arguably, the Saudis would cut a deal at some discount to the world market if it meant the Chinese were delayed in gaining energy independence.

    It is a comparative advantage issue.  The point is if the US drives down the world price of oil below the Chinese price of production, domestic oil is unprofitable in China. Right now the Chinese cannot produce fracked oil for a cost below that of the world price. By the time they can produce fracked oil at today’s world price, the world price is lower because of the still lower US cost of production due to future technology gains.

    At some point the gains stop, and then China can catch up.  But, if they attempt to go big-time on fracking before then, they end up bleeding out money. If they wait until that point, it takes longer to catch up. Either way, it will be a while.

    Seawriter

    • #26
  27. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    iWe:

    Misthiocracy:

    iWe: 3: Russia is toast. Gazprom is so very critical for them, and as Europe stops needing imported gas and oil, Russia will run out of customers.

    I wager that if Russia can’t find export customers for its oil and gas, the Russian military will be more than happy to find uses for their surplus fuel…

    That is a risk. But a military runs on more than fuel, and Russia is short a great many things. They cannot sustain much aggression.

    I fear the nuclear arsenal more. I still think a desperate blackmail attempt may be in our future at some point.

    How long does rocket fuel last? Don’t they need to refuel their ICMBs from time to time?

    ;-)

    • #27
  28. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Manny:I don’t know whether to agree or not. Is fracking revolutionary? Possibly but it’s a refinement of a process, which wouldn’t make it so. You certainly have given me something to think about.

    Fracking has been done in some form or another for decades, but recently the process has become much more efficient and refined. Newer methods don’t require nearly as much water, for example.

    As such, the rigs can be much more portable, can be set up in areas that are much more remote than was possible in the past, and they don’t leave nearly as large a footprint on the area after they’ve been packed up and moved on.

    • #28
  29. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Seawriter:

    It is a comparative advantage issue. The point is if the US drives down the world price of oil below the Chinese price of production, domestic oil is unprofitable in China. Right now the Chinese cannot produce fracked oil for a cost below that of the world price. By the time they can produce fracked oil at today’s world price, the world price is lower because of the still lower US cost of production due to future technology gains.

    A thought: One might hypothesize that if major efforts by China to invest in fracking was to occur, it could be interpreted as preparation for military conflict.

    Failing to produce fracked oil at a cost below the world price is only a concern when one is open to purchasing one’s oil on the world market. If one is planning for war, then securing an independent source of oil becomes more important than price concerns.

    • #29
  30. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Roberto:

    European dependence on Russian energy production is a deliberate policy choice. This will not be changing regardless of whatever natural resources are available to them, note how France and Germany have both enacted bans on fracking. Their hyper-environmentalist scruples rank higher than any qualms they may have with regards to being resource dependent on the Russians.

    And, really, it’s not an entirely irrational policy choice, depending on one’s point-of-view.  Western Europe is a pretty crowded place with few remaining “unspoiled” wilderness areas.

    If given the choice between ruining the view for local hikers and buying energy pumped out of the VAST Russian hinterland where nobody’ll ever see the aftermath, the choice for many pols would be pretty clear.

    I don’t see Neil Young or Daryl Hannah taking media-friendly “eco-tours” of  Russian energy fields like they do the Alberta oilsands.

    • #30
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