IN ORDER TO manage the growing imbalance between supply and demand, so far the Organization of Petroleum Exporting Countries (OPEC) has been relying on two pillars: first, Saudi Arabia’s willingness not to inundate the market with its full production capacity, which is obliging the Kingdom to preserve a spare capacity of at least 2.5 MBD; and second, Iran’s inability to export a sizable amount of its oil-production potential—more than 1 MBD—due to international sanctions. In the coming years, however, OPEC’s ability to manage growing global oil supplies will continue to decline, due to an Iraq struggling to become one of the world’s top producers, African countries looking for new outlets for their oil, the great potential of the United States, Canada and other countries—and an oil demand still stagnating due to a global economic crisis that shows little prospect of improvement.
What’s more, the recent interim agreement between Iran and the group of countries—including the United States—that are negotiating a solution to the long-debated Iranian nuclear program is now raising the prospect of the full return of Iran’s oil production to the international markets, perhaps as soon as the second half of 2014. All these elements will likely put OPEC under stress in the next few years, and Saudi Arabia in particular. Due to its spare capacity, the Kingdom remains the central bank of the world’s oil market, and holds the capability to stabilize or destabilize it. Faced with an effective oil-production surge from OPEC’s countries that hold the highest potential to grow, namely Iraq and Iran, and an overall rise of global oil production, Saudi Arabia will have to consider two opposite policy options.
On the one hand, it could opt to act as the world’s swing producer, reducing its output dramatically to make room for others’ in an attempt to support oil prices, as the Kingdom did in the early 1980s. But if such a reduction became an endless retreat, the Saudi government could also consider producing at full capacity to get rid of more expensive oil producers and oblige other OPEC members to taper their own output, as it did in 1986. In this case, a mild version of the 1986 oil-price collapse could not be ruled out, and that would put in danger both U.S. shale oil and the more expensive Canadian oil sands. The final result would be highly detrimental to U.S. energy security.
This is not the only Persian Gulf scenario that may negatively affect the United States. Needless to say, if a major political crisis endangers the oil production of Saudi Arabia or another big oil producer in the short term, oil prices would skyrocket, no matter how much oil America could produce. This could be good for U.S. shale but awful for the U.S. and world economy. These scenarios show that it would be a mistake for the United States to confuse notions about energy security and energy independence and, above all, to envisage the possibility of abandoning its historical involvement in Persian Gulf affairs, not to mention turning its back on Canada and other secure oil suppliers. Whatever the degree of energy security and independence the United States can achieve through the shale revolution, it will always be inextricably linked to what happens across the global oil market, and particularly in the Persian Gulf. This is also true when it comes to the evolution of its relations with suppliers of oil such as Canada. Shale oil may bring more energy security to the United States, but it cannot bring energy independence. Thinking otherwise can only lead to a rude reawakening.
Leonardo Maugeri is a senior associate at the Harvard Kennedy School’s Belfer Center for Science and International Affairs and chairman of Ironbark Investments LLC. He was formerly a top manager of the Italian oil and gas company Eni.'
Image: Flickr/Lock the Gate Alliance. CC BY 2.0.Image: Pullquote: Whatever the degree of energy security the United States can achieve through the shale revolution, it will always be inextricably linked to what happens across the global oil market.Essay Types: Essay