By Brett Daniel Shehadey
Special Correspondent for In Homeland Security
The Organization of Petroleum Export Countries (OPEC) increased oil output strategy was a direct retaliatory strike at the massive U.S. oil boom not seen since the 1970s. The main feature of the war is about political dominance, relevance and survival. But while one side sees this was war the other sees it as a private matter. By flooding the market, OPEC cut international prices in half from $115 last June to $57 per barrel as of today.
The only alternative was to invite the U.S. to their international oil feast and give them a bigger slice of the global oil share. This they were not willing to do. It is because of strong American oil competition. It is also about the survival of OPEC member’s profits by a declining expected future market share—profits which are also tied more into the stability of their regimes; specifically, social services. Saudi Arabia has about 20 percent unemployment for male workers, for example, according to the CIA World Factbook. The unemployed as well as the function of the state is dependent on these social petro-dollars.
Last year, America became the biggest oil producer in the world with a high of over 11 million barrels per day, according to the International Energy Agency. The predictions were that the U.S. would produce 13 to 15 million barrels of oil per day after 2020. Reducing their oil production levels to maintain prices would have only allowed the Americans to take their place. OPEC wants to relieve the U.S. of this new responsibility and trend and force them to have a smaller share of global oil. Instead of a decrease, they have increased production.
Saudi output went from 658,800 barrels of crude to about 10.3 million barrels, according to OPEC. Bloomberg notes that in the span of just 31 days, the Saudis did what took American drillers 3 years to do in the Bakken, for an equivalent amount of oil.
OPEC oil is dirtier but cheaper to drill, bubbling up from the surface and all one needs is a virtual hose and pump. U.S. operations are drilling deeper and deeper through rock with new technologies that continue to bring down the costs. But with costs averaging about $12 per barrel, it is not possible to truly compete with Saudi Arabia, whose costs are only about $6 per barrel, according to the IMF. This becomes even more important if the cost of oil drops to $40 or $50 per barrel. But again, it is not just about the price controls, so much as market influence and market share.
There is an additional threatening message of OPEC in their strategy: ‘stay down and out.’ They want to prove that they are the titans of industry with oligopolistic levers and the hidden message in the oil war is we can outlast you. And without the help of lifting American regulations, cheaper drilling techniques and opening up for export, American oil companies have backed off. They have slowed U.S. oil output from around 820,000 to 740,000 barrels per day, according to Bloomberg. If oil output on the U.S. side falls enough, OPEC gains more. If output on the OPEC side falls more, the U.S. would gain more.
Wouldn’t OPEC’s strategy hurt them too?
Yes, but they feel they have a stronger infrastructure and network to accomplish this. The bet is $750 billion dollar that they can endure the pain as well as retain the Saudi-OPEC advantage, according to Forbes. America could blow them away with a government backed program and a cool trillion but this will not be necessary in the long-term or with sanctions lifted for Iran. The Saudi have already lost $36 billion dollars in their own oil warfare strategy. They will lose a lot more if Iran breaks out with some estimated 30 million barrels of oil in storage. Other military and political conflicts will also derail a long-term Saudi oil strategy aimed at the U.S. Washington policy can help or linger this process.
The Saudis have institutions like OPEC that can work together in solidarity and other cost advantages. They can also pump more cheaply and with less restrictions and full government support. All of these lead to strengths in their overall energy strategy targeting new oil drilling and expensive sites, but likely only in the short-term time frame.
OPEC strategy hurts U.S. energy security and U.S. oil companies because if it costs more to pump oil than it might be better to store the oil, stop extraction and wait for the price go up, which is what they have decided to do. Meanwhile, American consumers, business and the government will pay more at the pump. Smaller oil exploratory companies in the U.S. are hit the hardest and countries around the world that depend on oil as a large part of their economy, such as Russia, have been struck even harder, as the bite ripples through their economy. This does not mean Russia or Iran cannot function while suffering economic sanctions and halved oil prices from last year highs.
Because most of American industry runs on freight trucks, the volatility of American oil companies affects everything; even military logistics and transportation costs. Sustaining losses in the market after OPEC’s strategic disruption was influential in their decision to see a higher oil price return. It might be another part of the strategy to buy American oil shares after the strategic trigger as the U.S. oil stocks rise again; thus taking more control of the American energy sector from within.
Underlying operational environment: Saudis and OPEC equates to a strategy (short-term results are a win; long-term results are uncertain). U.S. equates to no strategy (resorting to default private sector panic in response to profit losses while drifting in a flooded market, with hardly any government assistance and positive policy for industry competition).
The OPEC strategy harms U.S. national interests abroad because it decreases projective power through economy, finance and energy; which are extremely powerful tools of statecraft.
What America might have done instead of cave, would have been to increase the rate of oil production with the help of the U.S. government and dumped overseas as new incentives, laws and regulations permitted. This oil could have gone to Europe at a discounted price, for example. The U.S. could have forced the Saudis to pump so much oil that they would run out the hundreds of billions of dollar in reserve or held out long enough for OPEC to back down.
America could have partnered more strongly with the Canadians. Mexicans and Europeans oil companies. This would have been risky, but the regional cold war between Saudi Arabia and Iran and the conflicts in Syria, Iraq and Yemen will likely disrupt OPEC hegemony over the long-term.
An American strategy that incorporates these factors working with the private sector is essential; even if it has lost one battle; although some believe this was a colluded effort with the Saudis, the Saudis and OPEC are not impressionable to Washington concerns and interests.
Moreover, Europe faces the greatest energy insecurity in cost of production and they are still forced to draw oil from the mercy of tyrants when they could rely on more liberal and honest sources. Unfortunately, Washington has not focused on the security dimensions of the international oil market, save for a few, but has rather homed-in only on the environmental; to the exclusion of all other factors.
First fact: energy interdependence from foreign oil has resulted from America’s domestic oil boom and prices more than politics. This means that Washington no longer needs to play war games in the sands of the Middle East with negative consequential results. It can disrupt groups through intelligence, diplomacy and paramilitary actions. On the other hand, if OPEC wins continuous rounds and American production is again stalled, American international and strategic oil operations will not be possible in the short to midterm. This means the authoritarian regimes will continue to oil control without challengers or competitive alternatives.
Second, America’s oil revolution is a threat to illiberal, authoritarian, regimes. Hence the retaliation of OPEC and the oil war. OPEC consists largely of a list of human rights abusing tyrant states with few exceptions. OPEC membership includes: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
OPEC states increasingly act as hostile and or strategic energy competitors with the U.S. and are attacking U.S. energy prominence and ascension. These state’s regimes have consolidated their power from petroleum, while America has yet to do in form some anti-OPEC institution of liberal states. Western states have threatened OPEC in the past through other measures, including technological (i.e. fracking, alternative energies) or environmental campaigns and energy independence. America should continue these measures for energy policy as well but it must also dominate global oil industry with partners, if it can. Oil will be necessary for the next century in a transition to better alternatives. America must also dominate those alternatives.