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Geopolitical Shocks from Fracking
Technology 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?
Published in General
The two are very much interrelated. However green they may wish to appear, energy for Europe has to come from somewhere and it certainly will not be from any of these ridiculous renewables. Recall that men such as Schroeder worked quite diligently to bring about this exact outcome.
My thought is we saw how well synthetic oil worked for Nazi Germany (not a Godwin’s Law invocation – using the Third Reich as an example of an oil-short power at war). They could produce it in some quantity, but at a price much higher than the Romanian (or Crimean) oilfields. Bit not nearly enough for their needs.
Similarly the high cost of fracked oil comes from a low-production-to-drill-cost ratio. Don’t do it right and the well yields are low. You could dump a lot of money into wells and get little back. (That was George Mitchell’s experience through much of the 1990s.)
Your best plan for oil for military purposes is (a) stockpile; (b) develop a lot of refining and transport capacity, and (c) conquer nearby oil-rich territory. You need all three. Japan opted for (a) and (c) in WWII, and got bit by the lack of refinery capacity.
Seawriter.
Ok I don’t know how many times I need to bring up basic energy economics at ricochet but everyone yet again is missing the elephant in the room. Everyone needs to realize Oil is not used for power production in the first world (less than 1%). Oil is used for transportation and about 30% goes into industrial products.
On the other hand natural gas is barely used in transportation or industrial products. Natural gas is purely for electrical production or used as a substitution. It is used in electrical production and industrial applications that almost are always a substitute for electrical use. That is were 95%+ of the supply gets consumed in. So Natural gas and oil are energy sources but they are not really interchangeable in our currently economy, yet. So Fracking does very little to reduce Oil prices.
So if natural gas were to drop in half for 20 years one would see very little downward price pressure on Oil all else being equal. Yes more vehicles would become powered by natural gas but that is the only thing that would actually reduce Oil prices. However, you really would not see that big of an increase of natural gas transportation. I really don’t know what price natural gas needs to be for this to really become economical and see us change engines to use natural gas. Right now it is just some religious offering to mother earth that drives all of the transportation demand right now.
Also please ignore electric cars even with cheap electricity prices driven by fracking. Take away government subsidies and we are still decades away from being economically on par with Oil driven transportation.
Now fracking does hurt Russia since Russia receives a lot of money from natural gas. However it really has little impact on most oil producing countries.
However their is a Big But, this whole analysis assumes current technology. I don’t know when but I have been told we are only a few years away from being able to produce unleaded gas from natural gas at around $1.80 a gallon. So Fracking on its own really only has geopolitical impact on Russia and Europa and in the U.S. because over the long term it effect Coal prices not Oil.
However I don’t know the investment cost or payback period but if we can now use natural gas interchangeably as a gas source watch-out. This new refining technology will most likely completely change the Geo-political landscape and have huge long-term pressure at keeping oil prices low. I think we need to wait on see how much capacity gets built to see how much it impacts geopolitical but it will. That along keeping natural gas prices low via fracking might truly change the political landscape completely, that fracking alone can’t.
Regarding the Middle East, and correct me if I am wrong, the oil that is extracted from the ground in the ME is different from the oil extracted from the ground in the US. I think one is Light Sweet Crude and the other is Brent Crude. So the market effects are slightly different. I did not know this until reading an article in Foreign Policy (if my memory is correct on that). So I really think that the our drilling has minimal affect on the oil prices coming out of the ME.
It seems to me that wind and solar are perfect energy solutions for Isreal’s desalination process, as you can just make water when the sun is shining. Or does the desalinator need continuous power?
Brian,
iWe is talking about fracking for oil. The main production in the Bakken and Eagleford shale formations is crude oil – not natural gas. So, yes fracking does affect the price of oil.
As Z points out, this is not correct. Fracking produces both oil and gas, depending on the field in question.
Complete agreement here.
As above, this is incorrect. There is no shortage of stories about and by oil producing nations that reference fracking as a major threat to their oil revenue. Here are some quick finds: 1. and 2. Also, headlines like “OPEC bets against US Fracking.”
I agree entirely that new tech will change things. But this is all part-and-parcel of the underlying reality: energy is ultimately fungible. Very few things must be powered by oil (aviation fuel is one example). Over time, if one form of energy is cheap enough, then adaptations will be made.
Desal works with today’s market prices for electricity. And 0.2 cents per gallon is cheap enough for just about everyone to afford for human (non-agricultural or industrial) use.
Something that is expensive to build is still expensive, even if the fuel is free. Nuclear fuel is cheap – but the plants (thanks to regs etc.) are so expensive that it does not matter.
Sunlight is free – but solar plants are very expensive, and have limited lifespans and expensive maintenance costs (think of all the cleaning of dust off of collectors).
Wind fails for a range of reasons, which add up to this key conclusion: in the UK, the total wind power actually produced is all of 5% of the rated capacity.
Doug, a little off track, but I noticed one of your commenters was Flownover. Is he still with us? I’ve always liked his comments and his avatar.
So, if the US takes away the prohibition on oil exports, could we join OPEC? Do new members have to be voted in? It might be fun to join, and eat away at them from the inside.
This is one of the most interesting posts I’ve read on the site in a long while; it took me some time to think about the ramifications of fracking, but here goes:
1. Saudi Arabia- What happens when the revenue is not there?
The revenue is truly not there now; it exists only in the hands of a few. The disruptive consequences of this are already obvious. Don’t care about the ramifications of fracking in this part of the world; it’s already a disaster.
2. China will become energy independent.
The country has already opened Pandora’s box with a bit of controlled capitalism. As it is the nature of human beings to want more, the CPC will have its hands full (sooner rather than later) with citizens who enjoy making money and resent the lack of property rights. Chinese citizens are extremely nationalistic but I’ll take the bet on the demands of individualism. The PTB will be distracted with this problem.
3. Is Russia going to become the new Wild West?
Yes so we need to get serious again about protecting and supporting Eastern Europe and Ukraine. Unfortunately, Russia has no history of prosperity and peace and her citizens have no idea how to compete outside the black market. This country is big trouble.
Fracking is the future and the U.S. has always been far more efficient at delivering the future. We have to be the first at the goal line here (sorry for the sports metaphor, iWe) in terms of focusing our money and attention upon this industry. We need to be able to provide the cheapest and most easily procured product to the international community because economic dominance is power.
Another article on the falling cost of shale oil and gas, this time from MIT.
And, directly on point:
FIRST
Hydraulic Fracturing, known by its slang term fraccing in the oil/gas industry for DECADES, really isn’t new. It turned 65 earlier this year and most wells drilled in the last half century have had this procedure as part of either the initial drilling or rehab during maturity.
What is new, is geosteerable drilling which was developed in drilling wells offshore Louisiana. This combined with 3D seismic enables a better target with accuracy not before known.
SECOND
Now regarding Saudi Arabia, they are having some rivalry with Qatar in purchased influence in the region. Qatar’s rise in funds is linked with their plethora of very cheap natural gas from giant reservoirs. In global trade, natural gas price is tied to the price of oil. Thus with oil price collapse so does value of natural gas traded globally and Qatar’s cash cow. This is one point that few seem to recognize.
THIRD
In central Europe, tight shale oil is strip mined and used as a coal substitute.
Sorry reread your post still don’t see were you mention Oil Fracking. In the past everyone has always refereed to fracking in regards to natural gas. Typically I am used to people referring to shale oil when talking about Oil Fracking since that is all Oil fracking is really used for (at least that I am aware of). I am not aware of Fracking being used on old Oil wells to recovery deposit that 30 years ago were not recoverable. Or is this been the major change the expansion of fracking to more traditional wells?
However, what am I missing about shale Oil or Oil Fracking as of a late. It has been on the natural gas side were fracking really has sudden driven recovery cost down and production up. I am not aware of any major changes in oil fracking, yes the cost have gone down but that has been steady and mostly driven by high oil prices. I had thought with the low prices of Oil much of the shale oil production had gone away. So what is the average cost per barrel now with current technology with Oil Fracking?
No argument. The net benefits, however, have been achieved in a nonlinear fashion: at some point (best seen with the benefit of hindsight), new extraction technologies made the US production soar. And they are certain, sooner or later, to be applied in most countries with resources, which is to say, most countries.
I had not appreciated this fully, thank you.
I agree that oil and gas are not entirely independent of each other; there are fungible applications that can trade off between them. And in tightly balanced markets, small inputs can have outsized pricing results.
I did not know this at all. Is this for power plants, steel making…?
Shale oil production is near the all-time high. The number of rigs is down – production remains very high and presumed to grow.
Numbers seem to range from $40 to $70 per barrel. There is a strong consensus that at $60 and $65 per barrel, the taps open up. It provides an effective ceiling.
As technology improves, people expect the achievable cost per barrel to drop. But the “average” cost will probably be near the market price at any time. After all, if you can make $1 a barrel, you might do so. So whatever the price of oil is, any and all resources that can produce at below that price will do so.
It certainly seems plausible for the EU greenies to continue their dependence on Russian energy. The good news is that it will be at a significantly lower price point. Russia is and will continue to be cash strapped. Russia will sell all its production at every opportunity as it needs the money.
I don’t think the “free lunch” metaphor applies to technology because technology is a kind of force multiplier for human effort. Humans use technology as leverage to increase their own standard of living. The average human’s standard of living is better than it was, say, 500 years ago. If technology were a zero sum game then a few people today would have a first world standard of living and the rest would be living much worse than the average human did 500 years ago.
It is true that in certain countries average standard of living is low, but that is generally because of lack of property rights, oppressive political regimes, dysfunctional cultures and so on.
This is exactly right.
One could argue that cheap energy makes people live longer lives, which increases their ultimate health care costs…. but these kinds of arguments pretend that human opportunity and accomplishment are not important. Au contraire, I would argue that accomplishment (in all its forms) is the entire purpose for our existence. So cheap energy is a good thing.
But the consequences to world order, human freedom, etc. have yet to be written. We get to have a say in whether shale/fracking leads to a better Middle East/Russia/China or not – but to do that, we have to acknowledge the opportunity, and start working on it. I don’t see that the standard policy makers and politicians are doing this at all. Hence the post.
Good speculation and useful about this piece of creative destruction; big changes bring big destruction. It’s what drives progress, creates wealth but is also why many hate freer markets, why interests are always scrambling around capitals trying to find ways to slow it down or buy exemptions, and why sociologists run around wringing their hands whenever economic growth and modernization start to happen. Major changes in energy are among the most powerful of these forces, and will sweep a lot away but toward what is not knowable. That’s what’s so great about freedom and why attempts to control these changes from the top never turn out well. It’s simply beyond us. Who would have guessed that when oil went from 3 dollars to 30 that it would transform the Middle East into a rich but increasingly dystopian nightmare. It swept away and left fragmented and confused communities, families and individuals whose culture had been organized around artisan fabrication, agriculture, their guilds and other guild like organizations for over a millennium. It’ll hurt the oil rich countries to have to produce things rather than import everything and it will hurt some very severely, but is likely to benefit their people over time. Even Venezuela could renew its membership in western civilization and Russia? they’ll do just fine, couldn’t happen to a nicer dictator.
Ironically the United States has been pretty successful in reducing its per capita CO2 output. The reason for that is cheap natural gas. We have done better than Europe despite substantial investment and wind and solar there.
Another downside is that the shale revolution is extremely disruptive to traditional infrastructure arrangements. For the last 65 years energy has flowed from Mid-continent and the Gulf Coast to US demand centers on the east coast. But now natural gas supply in the northeast creates a need for massive infrastructure investments to connect that supply to markets. That is good for someone like me who is in that business, but I think it seems quite disruptive (at least temporarily) to people who see it.
I don’t have a link handy, but I seem to recall us beating the Kyoto Accords/Kyoto Protocol goals despite NOT being signatories. Meanwhile, several nations that did sign failed to meet the goals. And we got criticized pretty heavily by the left for not signing. I wonder what their response would be? They would probably credit the EPA.