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Posted: 15 Aug, 2016

Two Ways America Is Breaking Russia and OPEC's Grip On the Oil and Gas Market

Weak oil prices are not stopping, America rising as an energy superpower in 2016, weakening OPEC’s influence on the oil market and Russia’s control of Europe’s gas supplies.

February saw the first major U.S. gas export shipment from Cheniere Energy for Brazil. Cheniere believes the United States could be “one of the three biggest suppliers of LNG (liquefied natural gas) by2020.” U.S. LNG has even recently been exported to the energy-rich Middle East. The shale gas industry in the United States is rattling the world order.

U.S. oil production rose in 2009 with the emergence of the hydraulic fracking extraction method, and it kept rising until global oversupply forced U.S. production cuts last year. Saudi Arabia launched a price war against the new industry in 2014, prolonging the oversupply, with the Saudis hitting a new all-time production high just last month.

Their strategy of oversupply has rendered some suppliers economically unviable, but mainly it was other OPEC member states Angola, Nigeria and Venezuela. U.S. shale extractors were able to adapt, and cut production costs, maintain a profit margin even below that which Saudi Arabia needs to fund its welfare state, which the International Monetary Fund believes could go bankrupt in five years without major policy changes.

Outgoing Pioneer Natural Resources CEO Scott Sheffield last month declared his company had cut pre-tax production costs in the West Texas Permian basin to just $2.25 per barrel, and low production costs are not the only advantage U.S. shale extractors enjoy. Projects using traditional extraction methods often have have a five-year lead time and a ten-year payback time. The new shale projects have only a one-year lead time and an eighteen-month payback time, according to Goldman Sachs head of European Equity Research Michele Della Vigna. In addition, the ease of developing new projects, and of increasing or decreasing supply to meet demand, has drastically flattened the supply curve of the global oil market, and weakened OPEC’s power to manipulate prices.

Shale gas now means that the US could be a net exporter by 2017. Cheniere’s Sabine Pass plant in Louisiana, is already sending supplies to South America, India, and most notably gas-rich United Arab Emirates and Kuwait. Lack of investment and rising demand has forced the Middle East to turn to the United States for gas. 

This shale gas shift is also hoped to reduce Europe’s energy dependence on the Russia. If the politicians allow the United States to access the global gas market, shale-extracted LNG exports can diminish Putin’s grip on Europe.

A U.S. Energy Department study in December found that U.S. gas exports could inject between $7 billion and $20 billion per annum into the domestic economy.

If U.S. shale can withstand domestic political pressure against hydraulic fracking, and regulatory incentives promoting a shift to renewable energies, it stands to disrupt OPEC’s global oil cartel and Russia’s strong influence in Europe, and establish the United States as the new global energy superpower. Washington must get its act together, if the US is to cash in.

SOURCE: The National Interest, Anthony Fensom