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Few People Grasp What Geopolitical Power Shale Oil Gives To The US

By Mauldin Economics. Originally published at ValueWalk.

I know no one else with George Friedman’s breadth and depth of insight into today’s world.

Right at the root of today’s major global issues, we find one little word: oil. So, I’ve asked George to bring us up to speed on the geopolitical implications of a remarkable phenomenon: the US shale oil industry.

There is good news here for the US, but big bad news for Saudi Arabia and Russia—and in fact any country with oil exports as its main source of income.

But without further ado, I’ll let George and his team enlighten you on this development themselves.;

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Ray Dalio

Shale Oil: Another Layer of US Power

June 15, 2017


There’s scarcely a reason to point out how geopolitically important energy is. Energy, particularly oil, is a source of geopolitical power. Every country needs it, but only some countries have the resources to procure it themselves. Some countries have enough of it that they can profit from its export, and others have so much that they rely on it almost exclusively to fuel their economies.

Saudi Arabia and Russia are two such countries. They spend a lot of money on social services, and they can afford to do so as long as oil revenue keeps flowing in. In times of prosperity, they can, through OPEC, bully other countries into doing their bidding and even dictate the direction of markets. But when oil prices are low, as they are now, they simply don’t have as much money to pacify their populations or exert influence abroad. Pressure on their governments builds.

Simple supply and demand helps to explain why prices are low. When prices bottomed out a few years ago, most oil producers, including Saudi Arabia and Russia, were expected to cut production to normalize prices. Instead, they kept production high to increase their market share, thinking (incorrectly) that they would capitalize when prices rebounded. But perhaps a more important reason supply is so high, despite recent efforts by OPEC and Russia to cut production, is that the United States has exceeded expectations on how much oil it could bring to market. With the continued use of hydraulic fracturing and other related technologies, the United States is now believed to have more recoverable oil reserves than any other country in the world, and it is reaping the benefits of its newfound status.

Geopolitical Futures doesn’t forecast commodity prices, so we make no attempt to do so here. But the following report will outline a trend that has emerged over the past several years, one that will maintain downward pressure on prices and thus alter the global geopolitical landscape: affordable shale oil drilling in the United States.


Saudi Arabia and Russia are geopolitically important countries. What happens to Saudi Arabia affects the regional balance of the Middle East, and what happens to Russia affects Europe, East Asia and beyond. Their importance is due in no small part to their vast energy reserves, which are their primary source of government revenue. They create a high standard of living to which their populations are accustomed, pay state employees and give the government gravity on the global stage.

Since so much depends on energy, oil prices are more than just financially important. In Saudi Arabia, oil revenue has enabled the government to create patronage networks public and private alike. It has also enabled Riyadh to be the de facto leader of the Middle East. Without oil revenue, the government could not fund its Sunni Arab proxy groups in the battle for regional control, finance the war in Yemen, or even maintain social stability.

The story is much the same in Russia. Financial reserves have dwindled. Russia is considering cutting defense spending in the coming years (something it rarely does) and is struggling to finance state pensions. Now that its Reserve Fund is being depleted, Moscow will have to switch over to its National Wealth Fund, which has a little over $70 billion but which is, for various reasons, much more difficult to tap into.

OPEC, which Saudi Arabia essentially leads, has so much recoverable oil that it has been able to more or less control oil prices by adjusting production levels, sometimes in concert with Russia. But that is no longer the case. By some estimates, the United States has surpassed Saudi Arabia in recoverable oil reserves as advancements in hydraulic fracturing and horizontal drilling have enabled producers to access areas previously not thought possible.

A Deep History

Hydraulic fracturing, more commonly referred to as fracking, is a process by which oil deposits found in shale rock formations are extracted. Shale oil, also called tight oil, is enmeshed in shale rock, which is located thousands of feet beneath the Earth’s surface and is generally less permeable than other rock types, making deposits more difficult to access—difficult, but not impossible. Once producers drill down far enough to reach the shale deposits, they inject a solution made mostly of water (hence hydraulic) at high speeds to break apart the rock (hence fracturing), creating fissures through which oil can flow. Included in the solution are certain chemicals that assist in the extraction process and a kind of sand that keeps the fissures open once the fracturing is complete. (The process can also be used for natural gas, and its effect on natural gas prices is similar, but for the purposes of this report we will focus on oil.)

Though fracking has become more of a household term in recent years, it’s hardly a new technology. It dates back to the mid-19th century, when a man named Col. Edward Roberts devised a way to lower an explosive device through a pipe in an oil well that had already been drilled. Some of the wells in which this technique was used were thereafter 1,000 percent more productive (that’s not a typo).

Roberts’ explosive device was eventually replaced by another explosive, nitroglycerine. Even though nitroglycerine was used as late as the 1990s, companies began to experiment with using more inert materials as early as the 1930s. In 1949, Halliburton became the first company to fracture a well with water.

Geopolitical Power Shale Oil

Click to enlarge

It was also in the 1990s that producers began to combine fracking with a separate process known as horizontal drilling, which allows a well to be drilled vertically, then, when the drill hits the desired sedimentary layer, it is turned to drill parallel to the layer. In 1991, a well was successfully horizontally drilled and fractured for the first time, and in 1998, the first profitable horizontally fractured well was completed. The supply of US shale gas, and later shale oil, has increased ever since.

The United States has benefited from the shale revolution more than any other country. Not only does it have extensive shale formations, but most of its wells are located entirely within its territory, so producers don’t have to compete for jurisdiction or share their profits. (Brazil and Paraguay, for example, have overlapping oil interests that have sparked debate over ownership and sovereignty.) Still, the shale revolution

The post Few People Grasp What Geopolitical Power Shale Oil Gives To The US appeared first on ValueWalk.

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