Geopolitics ain't what it used to be thanks to fracking

I read today that the price of oil has plummeted. This would be unsurprising given the lethargic state of the economy, except that this news sits next to stories telling of extreme tension between Iran & Saudi Arabia, with Gulf States taking sides, and continuing unrest in Iraq. In other words, everybody in the area of the world’s leading producer of hydrocarbons is for a very rough patch and the price of oil FALLS.

People talk about geopolitical realities as if they are unchanging. But they depend heavily on the state of technology and cultural values. Until around 1900, places like Arabia or the Gulf had no oil. Of course, there was oil under the ground, but given the state of technology that oil may as well have been on the moon. If you cannot get it, you don't have it. Western technologies and demand created the product in a very real sense.

Fracking created value in oil and natural gas in North America, essentially nullifying much of the advantage enjoyed by the Middle East.

The stone age did not end because we ran out of stone and the oil age will not end because we run out of oil. Oil will be displaced in the next few decades by renewables and by technologies yet undiscovered. Some/much oil will remain untapped. I want most of that to be in places that are not America. Let them be left holding the bag.

A disruption of Middle East oil supplies, one that is not too severe, would be beneficial to the U.S. economy as American producers could get some of their lost market share. In a world swimming in oil, we no longer need think in the manner we did in 2005. We cannot be indifferent to the problems of the Middle East, but they need not be our central most concern.

We can see the change in so many ways that we might not even notice. Consider that the most urgent foreign policy concern today is Syria. Syria has very little oil. And we are not really even concerned with Syria itself. We care about Syria mostly because of the refugee crisis and threat of terrorism. In 2005, 1995, 1985, 1975 anon, we would be concentrating on the near existential threat coming from the potential conflict between Iran and Saudi Arabia. Today, not so much.

Posted by Christine & John at January 6, 2016 11:24 AM
Comment #401787

While fracking and advances in renewable energy technology have had an impact on the energy market, geopolitical forces have still controlled the market. The death of King Abdullah last year can be directly correlated to the drop in oil prices. Last year I commented that this would happen because the Saudi royal family controls the oil market and the newly appointed prince/sheikh (I can’t remember his name) had to flex the muscle of the royal family to let other countries know who is in control of the price of oil. They have done that. The disagreement with Iran only serves to allow the Saudi royal family to assert themselves even more. I honestly believe they could give oil away and still make money because of their investments in the industries that use oil. I am uncertain where this will end but have a degree of ambivalence since the Middle East is so unpredictable as to make any prediction foolish. I expect that the Saudi’s will continue with their plan until they reach the goal they require, what that is can only be surmised but it certainly involves geopolitical strength.

Posted by: Speak4all at January 6, 2016 4:52 PM
Comment #401794


The good news is that the U.S. has now become a swing producer. If all Middle Eastern oil were cut off for a long time, we would have trouble. But it is truly interesting to see that all this fury in the Middle East doesn’t affect prices. As I wrote, imagine this in any other decade since the 1960s.

Posted by: C&J at January 6, 2016 6:37 PM
Comment #401800

Maybe the Bloom Box is the real deal.

Posted by: roy ellis at January 6, 2016 11:13 PM
Comment #401804

C&J, I share in your jubilation regarding energy production in our country. It is truly amazing that we might be able to become energy independent in the not too distant future. I do have concerns regarding the political climate of the Middle East and it’s volatile nature. I also have concerns regarding the wastewater from fracking and the geological implications from this process but overall this should be viewed as something that needs to addressed and is being addressed from what I understand. My hope is that these concerns can be dealt with without the contentiousness that have been exhibited in other necessary oversight.

Posted by: Speak4all at January 7, 2016 9:48 AM
Comment #401853

Oil fell to under $33, and the main cause is not fracking. The main cause is that the Saudis and their allies are flooding the market. They can afford to do this. It denies Iran revenues, and if it causes the collapse of OPEC, what do they care? They have bigger fish to fry.

The US has been a beneficiary of fracking, of course, but make no mistake- this is about a conscious decision made by the Saudis and their friends, not just a result of the wonders of technology. It has the overall benefit of strengthening the US economy, but it will result in localized recessions in oil-producing states. Today’s unemployment results were spectacular: 292,000 non-farm payroll jobs added, with upward revisions for the previous two months, and a 5% unemployment rate. We’re killing it! With new unemployment claims at extreme lows, the new jobs are taking the remaining slack out of the labor market. Unfortunately, that will not help states like TX, OK, and ND, which will probably see job losses even as the rest of the country gains.

The biggest threat remains the same, namely, deflation. Falling oil prices add deflationary pressures. It relieves the Fed of any need to increase interest rates, since inflation has been running @ 1%, below the targeted rate of 2%. The current growth rate of a little over 2% seems sustainable. With no signs of an inverted yield curve, we’re still looking good. Typically, the yield curve will invest at least 1.5 years after rates start rising, and a normal type of recession will follow 1.5 years after that…
So most likely, we’re looking at another three years of growth!

The wild card is events abroad. The US has been carrying the rest of the world, and those crooks in China are dealing with their own messed up stock market and currency. Devaluing the currency 10% makes US goods from China 10%, thereby increasing deflationary pressure once again. But the aftershocks of the Great Recession are being felt to this day in the forms of deflation. Many countries made the mistake of addressing debt and deficits before establishing solid growth. They have paid the price. The US should have done more stimulus, but that’s over and done, and QE worked well, so we should be able to continue carrying the global economy.

Posted by: phx8 at January 8, 2016 2:52 PM
Comment #401881

Speaking of “aftershocks” here is an interesting update on the damage fracking may be doing to the country.

Posted by: j2t2 at January 10, 2016 7:10 PM
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