July 05, 2015
Myths of the Oil Boom:
American National Security in a Global Energy Market. By Steve A. Yetiv. Oxford University Press, New
York, 2015. 272 pp.
Even
the most casual of news observers would be hard pressed to disagree with the
opening of Steve A. Yetiv’s argument: oil is “by far the most important
energy source in the world.” Crude oil and its refined byproducts fuel the
global economy. The vast majority of vehicle driving worldwide—private,
governmental, commercial—is done with an internal combustion engine that runs
on gasoline or diesel. In many places, it is the main source of heat for
private homes. Of the top ten companies by revenue worldwide, half are in the
oil and gas sector. In addition to being big business, oil is a geostrategic
commodity. For the past forty years, the United States has been committed
militarily to the Persian Gulf in an effort to ensure security of supply.
Issues affecting the global oil
market have taken particular salience since the summer of 2014, as the price of
crude oil has plunged—thanks in part to new supplies brought to market by a
revolution in unconventional drilling in the United States, weakened global
economic growth, and a decision by Saudi Arabia not to cut its own production.
That latter policy change was widely interpreted as an effort to slow the U.S.
oil boom.
The ripple effects of this price drop have been quite
profound. Venezuela, an oil-producing nation that relies on high export prices
to fund social spending at home, had to send its president on a world tour to
seek foreign financial assistance to make up the shortfall. The government in
Baghdad says low oil prices are hurting its fight against the Islamic State in
Iraq and Syria, an extremist movement that partially funds its activities
through the black market sale of oil under its control. In the United States,
Alaska is facing serious declines in revenue from its oil and gas production
tax, as companies have slowed projects in response to price constraints.
Yetiv’s book is thus well timed, as it aims to explain
some of the fundamental issues that drive the global oil market, and the ways
in which U.S. drilling has and has not shifted the market’s long-term trends.
He outlines and then corrects several “myths”: that U.S. presidents can control
the global price of oil, that more oil produced in the United States means a
lowering of our involvement in the Middle East, or that big multinational oil
companies dominate the market. He clearly explains how unconventional
drilling—methods such as hydraulic fracturing or horizontal drilling, which
were not widely used even as recently as five years ago—is not solely
responsible for the current low-price environment. Rather, he argues, it took a
“perfect storm” including other factors as well: additional supply landing in a
market that was seeing less than typical demand; and the Organization of
Petroleum Exporting Countries (OPEC) defying the conventional wisdom of market
watchers by not cutting production to preserve a higher price band.
Busted myths are a useful
reminder that in the global oil market, a measure of uncertainty should
underpin any calculation about the future. Even with a strategic commodity such
as oil, where nation states jockey for advantage, the laws of supply and demand
have a pesky way of asserting themselves over the best-laid plans. As a result,
as revolutionary as the U.S. advances in unconventional oil production have
been, they do not guarantee insulation from a market reaction. Already, the
economics of these projects are being challenged by the unwillingness of Saudi
Arabia to cut its own production, even as the price of crude oil has dipped
below their budgetary break-even point (the point at which oil prices will generate
enough revenue to cover government expenditure). The market is resetting, and
no one can say with real confidence what the industry will look like even in a
year’s time.
These discussions lead Yetiv to his larger goal:
convincing Americans that the myriad benefits of the domestic oil boom, which
already have a tendency to be exaggerated, are no excuse for avoiding long-term
planning to reduce global oil consumption. If more U.S. production cannot
guarantee energy self-sufficiency and insulation from the vagaries of a global
market, he argues, then reducing the role that oil plays in the global economy
should be the proper goal. As long as oil is an essential economic input, the
international community will be invested in its exploration and production,
with various political, social, and economic consequences. Would it not be
better for American energy security, Yetiv proposes, if the United States led
the charge to reduce worldwide oil consumption, rather than focus exclusively
on continuing the drilling?
It is a worthwhile goal, and certainly necessary if
the planet is to avoid the worst effects of climate change. But Yetiv’s policy
prescriptions here lack a sense of robustness. For example, there is currently
no appetite, even from the otherwise environmentally conscious Obama
administration, to raise the gas tax in the United States. Research and
development in hybrid and electric vehicles continues, but it is not clear
whether an accelerated effort, which Yetiv calls for, would make much headway in
the current low-price environment—people buy these kinds of cars when gasoline
is expensive.
At the international level,
there is some optimism, as many countries are taking advantage of low crude
prices to roll back wasteful fossil fuel subsidies which, ceteris paribus, would decrease consumption as more people pay closer
to the market price. More international coordination on subsidy reform in the
oil and gas industry, which the International Monetary Fund has championed,
would be one crucial step. But the kind of “moonshot” reduction that Yetiv
seeks is unlikely to materialize. With crude prices hovering at their lowest,
outside of a period of global recession, in a decade, the political will
necessary to spearhead that level of international coordination is nonexistent.
Calls for that kind of activism were much more prevalent in the mid-2000s, when
oil prices were much higher (West Texas intermediate topped out at $133 per
barrel in July 2008), but even then, action never followed the talk. Unfortunately,
this state of affairs guarantees decades more of the kind of market and
geopolitical uncertainty spotlighted in this book.
Neil
Bhatiya is a policy associate at the Century
Foundation, focusing on U.S. foreign policy in South Asia. He was previously a
research fellow at the Streit Council for a Union of Democracies. On Twitter: @NeilBhatiya.