The Collapse of OPEC Power and the Coming Arab Winter

Fracking has changed the global energy equation.

Published Jul 30, 2013 11:24 AM by Dr. Michael Economides

Since its inception in 1960, OPEC has never been shy about flexing its energy-fuelled power over the West. But those days are gone. And it’s not just the U.S. shale gas and oil revolution which threatens OPEC’s decline. OPEC is already grappling with a whole bunch of serious energy problems that are colluding to hasten its demise.

Let’s just focus on the OPEC kingpin and world’s leading oil producer, Saudi Arabia. Even as the Saudis and other OPEC leaders have played down the nascent impact of U.S. shale development on global production (especially America’s growing self-sufficiency), the signs are that the Saudis are increasingly desperate to keep their #1 ranking in oil production. But the runes are not falling their way.

According to a Citigroup report in February, the record surge in U.S. oil production – in the first ten months of 2012 U.S. domestic production met 84 percent of its energy needs – now threatens the very existence of OPEC. The EIA reports that U.S. oil production expanded by a record 790,000 barrels a day last year. According to the Citigroup report, by the middle of 2013 the U.S. Gulf Coast will be supplied with oil from much closer to home – from North Dakota and Texas, displacing imports from Saudi, Iraq and Kuwait. OPEC itself has been forced to downgrade its economic prospects.

OPEC’s “World Oil Outlook” anticipates a decline in global demand for its oil through 2016 with production falling to 29.7 mpbd. That’s a drop of 1.6 mbpd from the forecast just a year ago. For the moment, much of the consequent fall in demand from the West is likely to be offset by a rise in demand from Asia, especially China and India.

But the real fear for the Saudis and for OPEC members generally is what happens to OPEC once U.S. shale-fracking technologies are exported worldwide. China’s domestic shale gas and oil reserves may add significantly to that country’s needs. So why import from the Middle East when a bonanza of oil and gas is right under your own feet? All the signs are that both China and India intend to invest heavily in shale development at home.

Last year saw the Saudis rake in a cool £347 billion from oil exports. But like all economically developing OPEC states, Saudi is seeing a steady increase year over year in domestic energy demand – last year by four percent. At this pace, Saudi will be consuming over three mbpd of its own production, displacing revenue from potential exports that it can ill-afford to lose.

More broadly, ExxonMobil’s energy outlook to 2040 reveals oil consumption in the Middle East generally will rise by 49 percent and natural gas consumption by a massive 97 percent, with the resultant impact on export revenues. In addition, Saudi has already committed itself to spending half-a-trillion dollars’ worth of oil export cash on domestic social programs, which it may soon find difficult to fund.

Saudi has also committed to gambling $100 billion of its oil riches on a 40 gigawatt solar energy project. And in February, the Riyadh government turned to Japan for help in developing nuclear technology that could enable it to build 60 new nuclear power plants. However, the simple fact is that all of this is unlikely to offset the potential losses expected to be suffered by depleting oil reserves and declining export revenues.

Plainly, the days when OPEC could hold the West to political ransom – as it did when it ordered an oil embargo after the U.S. supplied Israel with arms during the 1973 Arab-Israeli War – are over. The tables have indeed been turned due in no small part to the development of fracking.

Arab Spring to Arab Winter
And what about the Arab Spring?

Islamists have already hijacked it. But, as if internally extinguishing the hope of democracy isn’t enough, dark clouds are gathering to blot out the economic sun for the oil-powered Middle East states, ushering in – courtesy of the West’s fracking technology – a new Arab Winter.

The trouble, as we know, is that the economies of many Arab states rely almost exclusively on massive oil revenues. Without them, the leading lights of OPEC know it is only a question of time before the global export of U.S. fracking technology reduces them to their familiar basket-case economic status. 

Meanwhile, there is evidence that Israel’s onshore shale oil potential may be quite large. And Israel’s additional offshore conventional gas potential is set to rocket the Jewish state to energy superpower status rivalling the OPEC states. Still to come is the development of China’s huge shale resources that could eclipse those of the U.S. and Canada (the latter being oil sands). Then there’s the massive shale potential of Russia, Argentina and even Australia. Europe may currently be sleeping at the wheel of its energy road map due to environmental concerns, but it’s just a matter of time before the European monetary crisis – and the domestic riches to be had – silence the shale-development critics.

The Coming Age of Natural Gas
Geologists once believed that two-thirds of the world’s oil and one-third of its gas lay under a handful of Persian Gulf states. Just a few years ago, peak oil alarmism ruled the energy bookshelves. No longer. The world is changing and fracking is changing it. So what is the geopolitical fallout when much of the world no longer thirsts for Middle East Arab oil and gas?

Though the runaway success of U.S. shale gas would be difficult to emulate elsewhere, the coming age of natural gas is seriously threatening the current conventional oil powers. And that’s not surprising given that, as the EIA reports, for every $4 U.S. citizens pay for energy from natural gas, they pay $25 for oil. No wonder the world’s leading players – ExxonMobil, Sinopec, Total, Shell, BP and a host of others – are falling over themselves to buy a slice of the U.S. shale cake. Not just for the investment in the runaway success that is the U.S. gas industry, but as a key investment in their global fracking futures.

There are other serious implications for the Middle East oil states. With the loss of their oil-dominant position they will also lose much of their strategic relevance for the U.S. So who would “police” the Persian Gulf, keeping a lid on regional anarchy, if America leaves? The Saudis and other Sunni state heads are already as nervous as Israel about Iran’s regional nuclear ambitions. But even domestically, as the ability of the regimes to bribe their citizens with massively subsidized oil prices courtesy of foreign petrodollars diminishes, we are likely to see more and more street violence threatening regional stability across the region.

Then there’s terrorism. On the upside, there’s little question that global terrorism has (ironically) been sustained by an abundance of petrodollars. As we see the flow from that particular spigot greatly reduced, the ability to fund proxy wars and large-scale terrorist organizations will also be curtailed. However, the inherent sense of “victimhood” seemingly embedded in Arab culture – and fomented and used by Islamists – is likely to produce increasing individual acts of terrorist activity, both at home and abroad.

End Game
Let’s be clear: No one wants to see increasing poverty spreading through the Arab lands of the Middle East. But “victims” of Western policy the Arab states are not. The misuse of much of oil revenues by the failure to invest in their country and citizens, however, has left the Arab states vulnerable to advancing energy and technological developments.

While the global extent of the fracking-induced geopolitical tremors are still to be felt, the shaking up of the Arab Middle East and its tyrannical oil policies is moving the regional tectonic plates as politics never could. And there’s a lesson for the Western powers here, especially those still debating whether fracking is “green” or not. In the movies, love makes the world go round. In the real world, it’s energy.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.