Oct 13, 2014

The Butterfly Effect & Oil

The far-reaching effects of U.S. oil exports around the world

I have written a number of times in this column about fracking and how it is making a dramatic impact—not only on energy supply but on wide-reaching areas of the global economy and world politics. In my column last December (“Fracking, Take 2”), for example, I listed my top 10 questions about fracking, and several of those related to fracking changing the dynamics of the world economy, geopolitics and the U.S.’ role in numerous world regions and conflicts.

The U.S. has long been the world’s largest energy consumer, but with fracking, we are now also the world’s largest energy producer. We were able to take this position through the surge in production from fracking while the large oil-producing nations reduced their output due to political instability (e.g., Russia’s energy production is down considerably) or economic reasons (reducing output while waiting for a better world price). Our energy consumption is also down from what it was a few years ago because of advances in fuel and energy efficiency and a slower economic growth rate. This reduced demand in an environment of high levels of production has created a general surplus of oil and gas and an outright glut of some forms of oil and gas (particularly the light crudes and condensates associated with fracking). Because of these surpluses, the U.S. will, for the first time in decades, begin to export oil and gas.

A New Beginning

 In the decades since the oil embargoes of the 1960s and 1970s, the U.S. implemented policies and regulations to restrict exports of oil and gas. This was a strategic effort to conserve the oil produced in the U.S. by prohibiting exports to countries other than Canada. The attacks of 9/11 strengthened these initiatives, and further measures were added to diversify our supplies of oil. With the ongoing political instability in the Middle East, the U.S. systematically moved away from the Middle Eastern supply and toward other more reliable supplies. One of the regions that greatly benefited from this switch was the oil-producing region of West Africa, particularly Nigeria and Angola. 

In June of this year, the U.S. Depart­ment of Commerce licensed two companies to begin exporting crude oil, with the first shipments scheduled for this past August. With the surpluses that exist in the U.S., domestic producers are eager to export and get higher prices from foreign buyers. Additional companies also are expected to apply for export licenses. This will have significant impacts on the world oil market, not the least of which will be lower prices.

The U.S. switch to imports from West Africa became a “gold rush” of sorts in Nigeria and Angola, and those economies have become heavily reliant on the U.S. as the No. 1 destination for their oil. With the oil surpluses from fracking, however, exports from West Africa have been dropping dramatically. According to data from the U.S. Energy Information Administration, imports of Nigerian and Angolan oil have fallen to one-tenth of what they were just seven years ago, and it seems as if this amount quickly is heading to zero. This summer, cargoes of West African crude oil went unsold. These countries are slowly finding other markets for their oil in Europe and Asia, but demand from those regions is unlikely to make up more than a fraction of the demand they once saw from the U.S., and they likely will see a much lower price for their oil as well. 

This is a difficult problem for those nations. In Nigeria, for example, crude oil accounts for more than 95% of its export revenue and more than 70% of its government’s revenue. This revenue is not only essential for the stability of the government and the country’s continued development of energy and transportation infrastructure, but it provides the foreign currency needed for repayment of loans and the stability of local currency. At the time of the writing of this article, Nigeria also was battling a public health crisis with the spread of the Ebola virus. Presumably, the government’s ability to address this and future crises will be dramatically affected by the lack of oil revenue.

Will this lead to a new region of instability in the world? Will the boom these countries have seen in the past few decades turn into a tragic bust? President Obama hosted a three-day summit on business in Africa this summer to highlight future opportunities for trade with Africa given continued development of its manufacturing, energy and transportation infrastructures. Could progress be stalled by a dramatic change in the region’s economy due to oil? 

Global Reach

OK, so why am I writing about West African oil exports in this column? Because the enormity and wide-reaching impact of fracking and the shale oil boom in the U.S. never fails to amaze me. Shale oil is changing the face of the world economy and world politics along with it. And this is just from shale production in the U.S.; shale exploration and production in the other, larger fields in the world—in countries such as China, Russia, Brazil and others—is only beginning. 

The controversial environmental impact of fracking will continue to be studied and debated. But with the potential of fracking to change the face of the world economy and its political landscape, with fortunes to be made and vast political power gained or lost, there is far too much at stake to think that its progress will be slowed or halted. Much in the world will change in ways that will be difficult to predict. But shale oil’s “butterfly wings” will continue to have their impact. 

expand_less