Several recent articles point to the continuing rapid evolution of the world’s geopolitical order in regard to energy — what I dub the “geo-petroleum order”. The upheaval was caused by America’s resurrection as a dominant oil and natural gas superpower, which in turn was caused by the fracking revolution. This resurrection, I would suggest, has had two phases.
The first phase started in the 1990’s, when George P. Mitchel combined hydraulic fracturing (known for decades) with horizontal drilling. This technique — fracking, as it has come to be known — allowed oil production in America to grow like a bodybuilder on steroids. It grew linearly up about 50% between 2011 and 2015. This allowed the US to shrink steadily as a net oil importer. We are close to hitting the goal of zero net imports, which is to say we are close to energy independence. Moreover, fracking drove the price of oil down by something like two thirds, to the current range of $40 to $60 per barrel.
The introduction of that kaleidoscope creator of pointless boondoggles, the US Department of Energy, was another monumental mistake.
The second phase began when House Speaker Ryan managed — amazingly! — to get a bill through Congress allowing domestically produced oil to be sold abroad. And he got President Obama — no big fan of fossil fuels — to sign it into law. As I noted at the time, this was an astounding piece of work. It overturned a grotesquely stupid law (passed during the energy crisis of the 1970s) that forbade the sale of presumably scarce domestic oil abroad. It never occurred to the morons who enacted this law that it would discourage oil companies and innovators from finding different ways to extract oil here, and making them look abroad instead.
Parenthetically, I would suggest that future historians will record that it was primarily our own idiocy that caused our energy shortages during the period running from the OPEC oil embargo to the rapid rise of fracking — a period that saw the greatest transfer of wealth from the US to its enemies ever known, for which we were “rewarded” by terrorist attacks and Russian neoimperialism. The enactment of the aforementioned subhumanly stupid law prohibited the shipment of American-produced oil, incentivizing oil producers and innovators to focus on foreign oil production. The introduction of that kaleidoscope creator of pointless boondoggles, the US Department of Energy (DOE), was another monumental mistake. The projects it forced innovators to pursue exhibited a degree of asininity seldom exceeded in the private realm. These projects range from syn-fuels and geothermal energy to biomass and corn ethanol (the mother and father of all boondoggles) to solar farms and windmills that shred birds and produce expensive energy at the very times it is least needed. Another DOE achievement was killing of the fast breeder reactor, which would have taken the nuclear “waste” we have accumulated and use it as fuel.
The DOE should top the list of federal departments to be eliminated. And for those of you who are worried about a rise of ocean levels said to be caused by global warning, may I offer a helpful hint? Just create a US Department of Water Creation, and the ocean levels won’t just fall; they will simply dry up.
Development in ANWR will provide thousands of high-paying jobs and $60 billion in royalties for the state — some of which goes directly to the people of Alaska.
But I digress. The flawed tax bill recently passed by Congress and signed into law by the president contains a provision allowing limited drilling in the formerly locked away Alaskan National Wildlife Reserve (ANWR). ANWR — which is in the middle of nowhere, and protects nothing but mosquitoes — was created at a time of high oil prices, and with only one purpose: to deny oil companies the chance to develop a small piece of vast Alaska. ANWR was, of course, opposed by the great majority of actual Alaskans but favored by soi-disant “environmentalists” in Silicon Valley and Beverly Hills. But then, neither Silicon Valley nor Beverly Hills has Alaska’s unemployment rate, which is the highest in the nation. Nor do they have Alaska’s large budget deficit.
Development in ANWR will provide thousands of high-paying jobs and $60 billion in royalties for the state — which puts some of the funds in a master-fund, the income of which goes directly to the people of Alaska. ANWR will also rejuvenate the Alaskan Oil Pipeline, keeping that great project alive. Not bad, considering that the drilling will take place on less than 2,000 acres — which is one-hundredth of 1% of the ANWR reserve.
It has also been reported that the $3.8 billion dollar Dakota Access Pipeline — created to ship the burgeoning oil production from fracking operations in North Dakota — is delivering bountiful benefits after only six months of operation. Lowering the cost of shipping has caused an increase in production. October’s production hit 1.185 million barrels per day (BPD), which is about a 13% increase over the peak before the pipeline.
As a result, unemployment in North Dakota is exceptionally low (2.3% in November), state revenues rose by $43.5 million in the first five months since the pipeline opened, and the pipe is projected to deliver $210 to $250 million in extra tax revenue by the end of its first two years. That’s delivering the green!
Saudi Arabia is now looking to invest in — American shale operations! How the geo-petroleum worm has turned.
Speaking of green, there has been a bonus for the environment as well. The pipeline has eliminated about 83% of the train traffic carrying oil, with only two trains a day now needed to transport oil instead of the 12 needed before the pipeline. This dramatically decreases the chance of ecologically damaging oil spills, or hominid-damaging oil explosions when trains carrying oil crash.
Another encouraging report explores an unseen upside of the growth in American fossil fuel production. The domestic steel industry — long an industry under stress from foreign competition — is itself experiencing a rebirth. Both oil and natural gas are shipped mainly by pipeline (unless misguided environmental activists stop the projects) and the pipes aren’t made of wood; they’re made of steel. Recently the newer domestic steel plants have become dramatically more efficient and are increasing capacity in anticipation of the pipeline buildout.
One American steel manufacturer projects growth in domestic oil and natural gas for the next ten to 20 years. Shipments from American steel producers went up 5% in the first ten months of last year — not as good as the 15% experienced by foreign producers, but still on the right track.
Some American manufacturers worry that the domestic buildout in steel plants will lead to a glut. But research done by Pipe Logix estimates that the number of oil and natural gas wells increased by 60% in 2016 alone. Those wells, and the pipes that ship their products, both require steel. So the worry about a “glut” of domestic steel mills seems exaggerated.
The foxy frackers just tightened their operations and kept innovating, winding up with an amazingly flexible industry that remains profitable in a below-$40 per barrel environment.
The American fossil fuel renaissance is having an impact on our major oil competitors. There is fascinating news that Saudi Arabia is now looking to invest in — American shale operations! How the geo-petroleum worm has turned!
Specifically, Aramco — the Saudi state-owned oil company — has approached the Houston based natural gas producer Tellurian, looking to invest. Aramco is also looked at acquiring assets in the two huge fossil fuel basins, Permian and Eagle Ford.
Admittedly, these developments are only incipient. But the fact that the Saudis are knocking at the door marks a major shift. They realize that America — once a pitifully energy-dependent giant brought its knees by despicable dictators sitting on top of large oil reserves — is now the world’s biggest producer of oil and natural gas, eclipsing both the always-treacherous Saudis and the authoritarian Russians. If you add on our coal production, we completely eclipse other countries in fossil-fuel production.
How sad that is for oil potentates, socialist caudillos, and dictators in general, who got fat on oil at an over-$100 price!
Of course, while we are the world’s largest producer of oil and natural gas, we are still net importers, because we consume so much. But as we increase production, we will become a net exporter. And this is what the Saudis realize. Aramco already owns some refineries in the US (and elsewhere in the world), but all Saudi production of oil and natural gas takes place in Saudi Arabia. The new leader of the country (Crown Prince Mohammed bin Salman) plans to privatize Aramco, and the IPO shares would fetch a higher price if Aramco sites production here.
The Saudis have two other reasons for wanting to buy into US oil and natural gas production. First, they aim to understand better how fracking works in such nimble ways. A couple of years ago, the Saudis tried to drive the frackers out of business by jacking up their own production and thus driving down prices. For a while, the price of oil hit about $30 per barrel. This caused the Saudi government to hemorrhage foreign reserves, but the foxy frackers just tightened their operations and kept innovating, winding up with an amazingly flexible industry that remains profitable in a below-$40 per barrel environment. When the price drops that low, less efficient operations get closed, but they can be expanded again, in the blink of an eye, when oil goes over $50 a barrel. How sad that is for oil potentates, socialist caudillos, and dictators in general, who got fat on oil at an over-$100 price!
The Saudis envy this flexibility and deeply resent the fact that it will keep the price of oil below $60 a barrel for the indefinite future. Witness the Crown Prince’s attempt to seize the assets of corrupt relatives and get Saudis used to working, rather than living on welfare paid by the rest of the world.
The Russians have “kept up” with American technology since the time of Lenin, usually by stealing it.
The other reason the Saudis want to have operations here is that they want to shift from their reliance on their own oil to power everything. The world’s natural fossil fuel distribution has involved using oil to power transportation, but natural gas and coal to generate electricity — and coal is a much dirtier fuel. But Saudi Arabia’s own natural gas reserves — which are about equal to America’s — are sulfur-laden and hard to get out of the ground. So to convert its production of electricity to natural gas, the country would have to import 12 million metric tons of LNG annually. Extracting that here in America would make sense.
But I have another, deliciously rich, piece of news. It is said that imitation is the sincerest form of flattery. If that’s true our archenemy Russia is flattering us in the extreme. It is trying to develop its own shale.
Russia’s main shale formation — the Bazhenov formation — is the largest in the world. And Russian oil production is the largest in the world. But Russians are looking at oil fields that are six decades or more old, and have declining outputs. So they want to do what America did: recover peak production by means of fracking. The trick is to replicate America’s technological expertise. To this end, the Russian government — i.e., Putin and his corrupt cronies — is offering tax incentives for shale companies, and incentivizing cooperation among energy companies and research institutes to develop fracking technology.
Alexei Vashkevich, exploration director for Russian energy conglomerate Gazprom Neft, who conveniently worked on the North Dakota’s Bakken formation operations, assures us that the Russians won’t rip off American technology but will develop a totally different Russian technology.
Oh, please, Alexei — as if the new Russian 5th-generation fighter weren’t a direct clone of America’s F35. The Russians have “kept up” with American technology since the time of Lenin, usually by stealing it. Witness A-bomb plans stolen by spies, F35 plans, obviously filched by cyberspies, aka hackers, who use the computer and internet technology they stole from — Americans!
We should work to keep oil prices so low that they delay Russia’s massive military buildup.
The news article just mentioned observes that it will be, perhaps, another six or seven years before Russian fracking operations produce very much, in part because of the embargo placed on Russia when it dismembered Ukraine. But wait: if the Russian technology-to-be is going to be totally different from America’s, why would the denial of that technology hold back Russia’s development?
I think you can expect Russia to do three things in the immediate future.
First, you will see it unleash its hackers to steal massive amounts of American fracking technology. My advice to American fracking companies is this: If you haven’t done so already, set up encryption and other barriers to stop cyberspies from an orgy of theft.
Second, you should be prepared to see mysterious “environmental” groups spew colossal amounts of deceitful anti-fracking propaganda. These groups will be funded by Putin for the sole purpose of retarding America’s own fracking.
Third, you can expect a dramatic increase in Russian meddling with elections, here and in Europe, by feeding propaganda to news media and funds to political activist groups. They likely played a role in strangling Poland’s development of its own substantial shale formations — keeping Poland and the rest of Eastern Europe dependent on Russian natural gas and oil. No doubt they will try to elect anti-fracking candidates here as well.
My strong belief is that we should work to keep prices so low that they delay Russia’s massive military buildup. To do this, we need to open up more offshore sites, and more in Alaska, and push for the systematic exploration of the Arctic.
In this regard, there is some very recent good news. Secretary of the Interior Ryan Zinke has announced a plan that would overturn the Obama administration’s effort to restrict offshore drilling to only 6% of the American coastline. Under the new plan, fully 90% of offshore areas would be opened, in the largest sale of offshore leases in history. This is a huge new step towards the goal of making America, in Zinke’s words, “the strongest energy superpower.”
While oil company CEOs may fear a glut — and lower prices — consumers would welcome it.
This means that Southern California’s coastline would be open for offshore drilling for the first time since the late 1960s, when it was closed because of an oil spill in Santa Barbara. The East Coast offshore areas would also be reopened.
Naturally, environmentalist groups are already screaming. For example, Diane Hoskins of the activist group Oceana called the plan “absolutely radical.” This is to be expected. Democratic governors in several states (including California, Oregon, North Carolina, and Washington) also expressed complete opposition, and some Republicans became alarmed as well. Senator Marco Rubio and Governor Rick Scott both came out against drilling off Florida’s coastline.
Even oil companies have stated reservations, since they are now experiencing what they regard as a glut of oil. But while oil company CEOs may fear a glut — and lower prices — consumers would welcome it.
Zinke has pointed out that the plan will not be finalized until 2019, and only after comments have been received in public hearings around the country. While all that is pending, we can be thankful for inventive frackers and the prosperity they have given us.