- The Washington Times - Monday, February 4, 2013

Second of two parts.

For Americans who came of age in an era marked by worries about scarce world oil supplies, dominant international oil cartels and unrest in the Middle East, the times are changing — quickly.

Technologies bred in America are unlocking reserves of oil that for decades were considered out of reach. With oil production from shale rock, oil sands and deep-sea drilling booming in the U.S., Canada, Brazil and elsewhere, worries about Middle East-based oil cartels and vulnerable Persian Gulf supply lines are close to becoming things of the past.

“Until recently, the U.S. was importing a significant chunk of its oil from the Middle East,” in particular, Saudi Arabia and Iraq, said Fatih Birol, chief economist at the International Energy Agency. “But we expect the U.S. will not need Middle East oil sometime soon. This has implications for international oil markets and beyond that.”

Yet even as America’s energy resurgence enables the nation to dabble with the prospect of energy independence for the first time in a half-century and cast off a long-standing preoccupation with the oil cartel OPEC, China and other emerging titans are stepping to the fore with fast-rising energy demands that increasingly put them at the behest of OPEC’s producers. The combination is shaking up long-held assumptions about how U.S. political leaders should deal with the world’s most indispensable commodity.

Energy specialist Daniel Yergin recently checked off the fast-paced changes that have altered the outlook and astonished longtime observers including himself: U.S. oil imports have fallen from 62 percent to 40 percent of consumption since 2005 as a result of a dramatic turn toward conservation and fuel efficiency, coupled with domestic oil production that is the fastest-growing in the world. Canada — the “Saudi Arabia to the North” — has become the most important outside supplier to the U.S. and recently surpassed Libya as a major oil exporter, while Brazil is leveraging its huge offshore reserves to become a global energy powerhouse.

“The results of this hemispheric upsurge will have far-reaching consequences — nothing less than a rebalancing of world oil,” Mr. Yergin said, noting that China now imports more oil from the Persian Gulf than does the United States.

“Much less oil will come from the Eastern Hemisphere to the Western Hemisphere, and much more Middle Eastern oil will flow to Asia,” he said.

The $100-a-barrel shock

Mr. Yergin, vice chairman of the global business think tank IHS Inc., traces the sea change to the surge in energy prices nearly a decade ago when the world was consumed by worries about the scarcity of oil supplies because of the rise of China and other emerging markets, creating millions of middle-class consumers who were eager to make their first car purchases and emulate the Western lifestyle. Premium crude prices soared to more than $100 a barrel for the first time, peaking at $145 in July 2008.

Such prices provided incentives for oil companies to find ways to tap harder-to-get resources such as North Dakota’s Bakken shale and Alberta’s oil sands that had been uneconomical to obtain in years past. Extraction suddenly became profitable at the higher price levels, using costly and complex technologies developed in what Mr. Yergin describes as a “great bubbling” of energy innovation.

“Something very dramatic happened in world oil in 2004. We left behind a world of $20 oil and entered the world of $100 oil,” which corresponds with gasoline prices of $3 to $4 a gallon on average, Mr. Yergin said in an interview with McKinsey & Co. last year. “What happened was the recognition of the impact of emerging market countries and what their demand would be, and that growth in world oil demand would shift from the traditional industrial countries to these emerging markets. That has carried us to a new higher price plane” and launched the drive to exploit huge unconventional oil reserves that is now bearing fruit in North America.

The higher prices of the past decade kick-started the trend toward energy conservation that has shaved billions of dollars off U.S. oil trade deficits. The trend promises to accelerate as the Obama administration ratchets up fuel efficiency standards for cars and trucks.

Technologies and materials also are making possible average miles per gallon of 50 or higher in cars and sport utility vehicles.

The combination of fuel savings and increased production from unconventional sources has allowed Americans to entertain hopes for energy independence. Although it will take “heroic” efforts to achieve, Mr. Yergin said, oil independence is no longer just a “chimera” held out by politicians as it once was.

OPEC’s China pivot

That prospect also ushers in a major shift in OPEC exports toward China and the rest of emerging Asia — especially as Iraq ascends once again as a game-changing exporter — in a development that also has important implications for the U.S., Mr. Yergin said. While triggering a potentially fundamental reordering of U.S. priorities in the Middle East, it also heightens the importance of the U.S. managing its relationship with China so that the competition between the two economic giants over securing energy supplies doesn’t turn into outright conflict over such issues as Beijing’s energy claims in the South China Sea, he said.

China already consumes more energy from all sources — coal, oil, gas and renewable fuels — than the United States, and it has an increasingly urgent need to secure its supplies much as the U.S. did when it shifted to heavy dependence on imports in the 1970s. Demand for oil continued to strengthen in China even during the recession, while oil consumption in the U.S. and other developed nations peaked years ago, with U.S. demand down 10 percent since 2005.

“The more confident the Chinese are about their sources of energy, the more comfortable everyone will be,” Mr. Yergin said.

Radical changes forecast

Others see even more radical implications as the U.S. breaks its dependency on Middle Eastern oil, with the potential to shatter some longtime assumptions in the global landscape.

“It has geopolitical implications that can be debated almost endlessly,” said John Kingston, global director at Platt’s Insight. “If the U.S. gets to the point where it is no longer importing any crude out of the Persian Gulf, why is the U.S. Navy patrolling the Strait of Hormuz?”

The U.S. for decades has had a major military presence in the Middle East to secure its supplies and those of its allies in Europe and Japan. But the cost of the military operations is large in an era when the U.S. is having to make major spending cuts to avoid the kind of sovereign debt crisis plaguing Europe. The U.S. military presence in the Middle East has had some undesirable side effects, such as stoking the indignation of militant Muslims in the region in a way that has helped feed support for the al Qaeda terrorist network — one of whose prime goals is to get the U.S. out of Muslim holy lands in Saudi Arabia and Iraq.

James Jeffrey, former U.S. ambassador to Iraq, said the U.S. will have to maintain its presence in the Persian Gulf despite the budgetary pressures.

“The region keeps erupting into one kind or another of violence or instability. So we have to be present,” he said on Platt’s Energy Week. “Oil is fungible. There is one international oil market. [If] prices go up because of shortages in one area, they are going to go up in every other area, even in the United States, even if we import from safer areas or produce it ourselves.

“Even more importantly, at the very core of America’s security relationship since World War II has been guaranteeing supplies of oil and gas to our friends and allies. Even if we are independent in energy, most of our friends in East Asia and certainly in Europe, and elsewhere in the world are not.”

Mr. Kingston sees another major question arising from the changing oil dynamics: “Why does the U.S. need to hold so much oil in the Strategic Petroleum Reserve if its import dependence is plummeting?” he asked.

President George W. Bush undertook to fill the reserve to a record 727 million barrels, often at prices of more than $100 per barrel. Yet the oil has rarely been used, even though the U.S. from time to time has been threatened with oil shutdowns because of wars and embargoes in countries such as Iraq, Libya, Venezuela and Iran. The reserve contains enough crude to cover 90 days of imports at the current, reduced rate of consumption, Mr. Kingston said.

Oil analysts expect that political leaders will be tempted to sell some of the oil in the reserve in the future either for political or budgetary reasons, to help at least temporarily reduce the budget deficit.

• Patrice Hill can be reached at phill@washingtontimes.com.

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