Specialized oil bulletins contain dozens of articles about what they deem the “brilliant success" of shale oil and gas production in the United States, and the challenges this new trend in the oil industry faces, which extracts oil from unconventional sources. One such article was an op-ed written by Alex Ward in New Statesman, entitled “U.S. set to become world's top oil producer – The new Saudi Arabia?" But what are the milestones cleared by shale oil over the past five years? Well, the U.S. oil output grew to globally high levels, and it is likely to grow even further. Indeed, the U.S. output of crude oil and hydrocarbon liquids is expected to grow by about 7 percent this year. The U.S. Department of Energy (DoE) estimates that this output will rise to about 11.4 million barrels per day by the end of 2013 (the current productive capacity of Saudi Arabia is about 11.5 million barrels per day, while the productive capacity of Russia is about 10.3 million barrels per day), while experts from Citibank predict the U.S. output to grow to 13-15 million barrels per day by 2020. Global oil markets have recently started to factor in the implications of U.S. shale oil and gas production on prices and exports in both the near and medium terms, as well as over the long run, particularly in light of the expected new supplies that will come from Iraq, Kazakhstan, and Angola – at a time when global demand for crude oil is shrinking because of the successive economic crises since 2008. According to the latest Medium-Term Oil Market Report (MTOMR) issued by the International Energy Agency (IEA), it is expected that over the next five years, the “call on OPEC" – i.e. demand for oil from OPEC countries – will be trimmed further “with downwardly revised demand projections and the promise of new [oil] supplies." The MTOMR also ruled out that demand for OPEC oil would rise in 2017 beyond its present level of 31 million barrels per day, and predicted that surplus productive capacity in some OPEC countries would return to comfortable levels. The surplus productive capacity, which is usually allocated for contingencies in global oil markets, is considered an important indicator that gauges upwards or downwards trends in oil prices. According to the IEA, there are more than 300 billion barrels of shale oil and tar sands reserves, which can be produced at a cost of $40-80 per barrel, compared to $110 per barrel of Brent crude. The budgets of most OPEC countries rely on an oil price range of $85-90 per barrel, which means that these countries will push for maintaining a price of $90-100 per barrel to avoid having budget deficits, and to ensure they can meet their internal and external obligations. The fact that shale oil and gas is now being widely produced in the United States means the following: Since this development has taken place in the world's largest oil consuming and importing country, increasing U.S. oil output means that a political/economic goal that American politicians have long called for since the early 1980s is gradually happening. This goal is so-called energy independence, and reducing dependence on oil imports, particularly from Arab countries. This is despite the fact that American oil imports from Arab countries are extremely limited, and do not exceed in most cases 10 percent of the total oil imports of the U.S. If the U.S. starts to export oil soon, as it is now exporting gas, this will mean that it will come to play an influential role that it was not available to it previously in the global oil trade, particularly as the U.S. allows the market to determine the price of its oil and gas resources. This also means that U.S. security interests in the oil-producing countries may change, with these countries not being given priority anymore as has been the case in the past decades. In addition, OPEC's role and influence may diminish. All these possibilities will be very significant for the global oil industry, and will no doubt leave their mark on the geopolitical conditions and the oil landscape of Middle Eastern countries. Nevertheless, it is important to assess the challenges faced by the shale oil and gas industry before starting to speculate about its implications. It is known, for example, that this industry requires large amounts of water, and that it runs the risk of contaminating nearby water aquifers. This means that its development faces a lot of obstacles, amid strong opposition by the increasingly influential environmental groups. There is also opposition to exporting oil and gas by the U.S., with legal cases brought before courts to stop exporting oil and gas so that U.S. consumers can benefit from these supplies at lower prices instead. If U.S. exports are curbed, then the importance of shale oil and gas diminishes. Meanwhile, there are persistent attempts by international oil companies, particularly from Europe and Asia, to acquire independent American companies involved in shale oil production to acquire the technology and transfer it to their home countries. Yet even this faces many hurdles, including also opposition by environmental groups and the fact that water resources are scarce in many countries, not to mention the lack or the inadequacy of the infrastructure in place. It is clear that shale oil poses the greatest challenge for Middle Eastern oil in the foreseeable future, unlike other alternative energy sources which could not penetrate the market except in a very limited manner. So do these developments mean that the importance of oils produced in the region is declining? Does the significance of Middle Eastern oil lie in the fact that it is available in abundant reserves, or is it due to the surplus productive capacity that is crucial in times of crisis? Finally, why can't the U.S. maintain a surplus productive capacity like some Arab oil countries? Clearly, the importance of Arab oil producing countries does not lie in its massive reserves alone, but also in the spare productive capacity which they tap into to avoid any global shortage in supplies. The Arab countries implement these policies through their national oil companies. But in the U.S., it is private companies that handle oil production, and these companies are mostly after quick and immediate profits. This means that they are only interested in producing at maximum capacity, without paying attention to securing surplus productive capacities. Shale oil poses a significant challenge to the countries of the region indeed, both geopolitically speaking and as concerns their oil industry. But it is important that think tanks focus their attention on studying this issue, in order to identify the nature of this trend both at the appropriate time and in a rigorous manner. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
