The Political Economy of Shale Oil
February 13, 2015
Written by MAAS student Fatim-Zohra El Malki
“The Political Economy of Shale Oil” was the fourth panel of the 2015 Sheikh Abdullah Kamel Symposium and took place on February 13, 2015. The panel included Dr. David Painter, Associate Professor of History at Georgetown University, Dr. George Shambaugh, Associate Professor of International Affairs and Government at Georgetown University, and Dr. Mohamed Ramady, Visiting Associate Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia. This panel examined the political economy of shale oil production and its impact on energy demands and supplies, oil prices and financial markets.
Debuting the panel, Dr. Painter analysed the causes and consequences of the dramatic drop in the price of oil since June 2014. While numerous analyses of the price drop have focused on the supply side and on the rise of shale oil production in the United States, Dr. Painter’s talk argued for a comprehensive analysis that gives enough attention to the demand side as well. Since 2005, oil demand in the United States has been negative, with a lower consumption driven by higher oil prices. The decrease in prices, which has been linked to higher production rates in the United States, could have happened earlier than June of 2014, but numerous disruptions retarded this scenario, including: the sanctions against Iran, the Arab revolutions, and the chaos which engulfed Iraq and Libya. All of these factors contributed to high oil prices by keeping large amounts of oil off of the market. Dr. Painter then provided an assessment of the environmental consequences of shale, a non-renewable resource deemed of greater harm to the environment that conventional oil. The high-tech practice of shale extraction is already having an impact on delicate ecological systems (alarming changes to the environment, changes in temperatures and sea levels, increased greenhouse emissions, etc.) and there are grave concerns that geological limits will trump technological advances in the long run. To illustrate his argument, Dr. Painter used the Red Queen hypothesis; where there is a need to continuously keep drilling in order to maintain current production levels. Dr. Painter advises that developed countries, and particularly the U.S., to take the environmental impact into account and decrease consumption, particularly during euphoric periods of low oil prices.
Dr. Shambaugh presented his paper, co-authored with Aaron Tayler, “Evolving Hotspots and the Geopolitics of the Energy Revolution.” In this paper, Dr. Shambaugh addressed a number of questions that arise from the use of natural gas instead of other fuels, such as coal or oil. First, he argued that the creation of incentives to develop natural gas production and transit capacity around the globe has disregarded several national security issues and other geopolitical consequences. Other questions relate to the risks associated with the transportation of natural gas and the security dilemma associated with the development and protection of such a vast energy transport infrastructure. The security dilemma presented here involves the dynamics of pipeline protection and the consequences for exporters and importers, such as Japan and South Korea. Today, the negative impacts of natural gas (dangerous transportation, low value of sales) are being transformed into a resource blessing, in spite of its limited export potential, the spill over effects, and the dispersed locations of natural gas, which all work to reduce the possibilities for centralized control of the market.
Dr. Ramady explored strategic options for Saudi Arabia in light of the sharp fall in oil prices. According to Dr. Ramady, the drop in price is also indicative of Saudi Arabia's confidence in a bright economic future, thanks to substantial spare capacity and financial resources, which have enabled the country to impose its economic vision in which market led forces determine oil prices. This runs contrary to the longstanding practice of seeking to set prices through establishing quotas on other financially stressed OPEC members, such as Venezuela. Saudi Arabia has now changed course by refusing to continue to act as a swing producer. Its fellow GCC OPEC members the UAE and Kuwait, who along with Saudi Arabia have publicly announced their willingness to allow prices to fall to $20 a barrel, have supported the country in this initiative. This aggressive course of action is a deliberate strategy to defend their important market share from shale producers and other marginal non-OPEC suppliers. The fragile and often capricious relationships between OPEC member states have been highlighted by the new Saudi/GCC position, particularly in terms of the ineffectiveness of quota-setting and practices such as price band market signalling policies, with all OPEC members now utilizing price discounting as an attempt to maintain their market shares. Dr. Ramady’s presentation analyzed the rationales and consequences on both OPEC and shale oil producers in light of Saudi Arabia’s new shift in energy policy. It also examined how, in lieu of cooperation, the current drop in both shale and crude oil prices will impact long-term investments, capacity building, and the destruction of existing supplies by certain OPEC members including Venezuela, Iran and Iraq. Dr. Ramady’s analysis concluded that such a state of affairs will eventually lead to longer-term increases in oil prices to the detriment of consumers around the world. In Saudi Arabia, a change in the attitudes towards domestic consumption is necessary for the country to sustain. Another recommendation is economic diversification, and high break-even prices.
Dr. Rochelle Davis
Dr. Rochelle Davis is an Associate Professor of Cultural Anthropology in the Center for Contemporary Arab Studies at Georgetown University’s Edmund A. Walsh School of Foreign Service. Dr. Davis’ research focuses on refugees, war, and art. Her book, Palestinian Village Histories: Geographies of the Displaced, (Stanford University Press, 2011) addresses how Palestinian refugees today write histories of their villages that were destroyed in the 1948 war, and the stories and commemorations of village life that are circulated and enacted in the diaspora. Professor Davis’ current research focuses on the role of culture in the U.S. military in the war in Iraq via interviews with Iraqis and US military personnel as well as the cultural training material produced by military institutions and contractors about Iraqis, Arabs, and Islam. She is also conducting research on Iraqi and Syrian refugees with Georgetown’s Institute for the Study of International Migration (ISIM) and she works closely in developing the Palestine Poster Project Archive.
Dr. David Painter
Dr. David Painter teaches international history at Georgetown University. His publications include Oil and the American Century: The Political Economy of U.S. Foreign Oil Policy, 1941-1954; The Cold War: An International History; and Origins of the Cold War: An International History (co-edited with Melvyn P. Leffler); and articles on U.S. policy toward the Third World, U.S. oil policies, and the Cold War.
Dr. George Shambaugh
Dr. George E. Shambaugh, IV is Associate Professor of International Affairs and Government in the Edmund A. Walsh School of Foreign Service and former Chairman of the Department of Government at Georgetown University. Dr. Shambaugh received a B.A. in Government and Physics from Oberlin College an M.I.A. in International Affairs, and an M.Phil. and Ph.D. in Political Science from Columbia University. His research and teaching focus on topics of international politics, foreign policy, international political economy, and the environment. He is the author of States, Firms, and Power: Successful Sanctions in US Foreign Policy, co-author of The Art of Policymaking: Tools, Techniques, and Processes in the Modern Executive Branch. He is co-editor of Anarchy and the Environment: The International Politics of Common Pool Resources and co-editor of Taking Sides: Clashing Views on Controversial Issues in American Foreign Policy. His articles have appeared in a range of journals including the American Journal of Political Science, International Studies Quarterly, the Journal of Peace Research, Review of International Studies, ASAP, International Politics, Environmental Politics, International Interactions, Security Dialogue and the Journal of Diplomacy and International Relations. Dr. Shambaugh has received grants and awards from the National Science Foundation, the Smith Richardson Foundation, the Social Science Research Council, the MacArthur Foundation, the International Studies Association, the American Political Science Association, and the Oberlin Alumni Foundation. Dr. Shambaugh has been a MacArthur Foundation and Dwight D. Eisenhower/Clifford Roberts Fellow.
Dr. Mohamed Ramady
Dr. Mohamed Ramady is currently a Visiting Associate Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia. He specializes on regional geo-political risk assessment and the Saudi economy, energy, money and banking, labor policies of the Gulf, globalization, and WTO. He authored The Saudi Arabian Economy: Policies, Achievements and Challenges (Second Edition - Springer 2010) and was editor of GCC Economies: Stepping up to Future Challenges (Spring 2012), and Economic, Political and Financial Country Risk: An analysis of the GCC countries (Springer 2013). He is currently completing several books on OPEC, the rentier theory revisited, and the political economy of social capital (Wasta). Dr. Ramady has held senior level positions in banking, finance, and investment, and was the project manager for the establishment of guidelines for Saudi Arabia's WTO Centre for the Saudi Chambers of Commerce. He also served as Vice President with Citibank, where he was posted in Europe and the Middle East and seconded to the Saudi American Bank. He has held senior executive positions with Chase Manhattan, First City Texas Bank, Qatar National Bank, and Qatar International Islamic Bank. Dr. Ramady obtained his BA and PhD in Economics from the University of Leicester, UK, a master’s degree in Economic Development from the University of Glasgow, UK. He is a Fellow of the Chartered Institute of Bankers, UK.