POLICY IMPLICATIONS OF SHALE OIL
February 13, 2015
Written by MAAS student Jennifer Melis
In concluding the 2015 Sheikh Abdullah Saleh Kamel Symposium, “An Energy Revolution? Political Ecologies of Shale Oil in the Middle East, United States, and China,” the Center for Contemporary Arab Studies welcomed three panelists to discuss the policy implications of shale oil production, especially as they pertain to the involvement of the United States in the GCC/MENA region. The panel took place on February 13, 2015, and included Mr. Casimir Yost, Professor at the Institute for the Study of Diplomacy at Georgetown University; Dr. Eckart Woertz, Senior Research Fellow at the Barcelona Centre for International Affairs; and Dr. Thomas L. McNaugher, Senior Visiting Professor in the Security Studies Program at Georgetown’s School of Foreign Service. Key themes addressed in this panel included the foreign policy dimensions of the energy revolution as they relate to energy dependency, political governance, and regional and global balances of power.
Drawing on experiences as a practitioner as well as an academic, Mr. Yost initiated the panel discussion with his presentation on “Geo-Strategic Shifts: The Energy Variable and More.” The central thesis of Yost’s presentation focused on the critical importance in understanding the broader strategic context within which the contemporary energy revolution is unfolding, along with its geopolitical consequences. Energy, Yost argues, is but one of many variables that will shape the future of global security and wellbeing. This “broader strategic context” Yost refers to includes a number of consequential trends impacting the changing geopolitical landscape.
During his tenure at the National Intelligence Council, Yost contributed to the production of the Global Trends 2030 report, which identifies three key drivers, or “megatrends,” that are consequential as we look to the future: demography, the diffusion of power, and the impact of technology. The world is experiencing rapid population growth, especially with respect to the global middle class. This translates to increased pressure on energy production, as growing energy consumption leads to greater demand. Accelerating technological changes hold profound implications for the future of state-to-state relations. Further, there is a growing trend in the diffusion of power, changing power dynamics between and within states. This has caused a shift in the global balance of power, where we no longer see a few powerful nations defining the trajectory of fundamental issues of the day. Beyond these “megatrends,” Yost identified two more variables he refers to as “game changers”: the crisis-prone economy and the growing governance gap. Together these variables function as disruptive forces in the geopolitical arena, where there will be definitive global winners and losers. As Yost concluded his presentation, he warned that the challenges going forward do not lie with the ability of energy producers to meet demands in a healthy market, but rather with the consequences of severe market interruptions. Yost importantly highlighted that we are still “early in this story,” and at this point can only anticipate future outcomes as the story continues to unravel.
Dr. Woertz shifted the focus of the discussion to “Saudi Arabia as Price Taker: 1980s vs. Today.” Woertz’s presentation focused primarily on how Saudi Arabia’s position in the global oil market—and the pricing regimes of these oil markets—has changed over the past few decades. While there is one global oil market, there is not just one oil price: rather there are multiple pricing regimes that report various oil prices. These pricing mechanisms have changed over time, having at times in the past been controlled largely by the vertically–integrated oil companies, OPEC, and to a lesser extent, the laws of supply and demand. Further, the ongoing fluctuations in oil prices have a great impact on global oil production and supply. Today, many people believe OPEC sets the price of oil; however, Woertz repeated a comment made earlier suggesting that OPEC is a “cheaters’ club,” as he argues that OPEC does not have as much pricing power as one would think. Further, we no longer see vertically-integrated energy companies, thereby leading to new price discovery mechanisms. Indeed, pricing schemes occur largely outside of OPEC countries, namely in London and New York, and align with the convergence of supply and demand in the international market.
Woertz did point out that of the OPEC countries, Saudi Arabia is the key player when it comes to spare capacity and pricing power. The Kingdom has held a historical role in controlling global energy supplies and prices through restricting or increasing its oil production. Beginning in the 1970s, Saudi Arabia took a conservative stance, in which it was less inclined to increase prices due to fears of demand destruction in industrialized economies. Following the second oil shock, this fear materialized and the Kingdom attempted to balance the energy market by acting as a swing producer—at first cutting production, and later flooding the market in 1985 to regain market share. Beginning in the 1990s, the Kingdom has sought to achieve a balance between the two extremes to stabilize the oil market and ensure sufficient revenues to finance its social contract. Currently, Saudi Arabia still functions as a swing producer maintaining a large spare capacity, perhaps to mitigate market risks or to meet growing domestic energy demands. Woertz concluded his segment by proposing the potential for cooperation between U.S. shale oil producers and GCC countries, as both parties share an interest in high oil prices.
Dr. McNaugher concluded the panel with a talk on “Fracking and the Elusive Search for Energy Independence.” In his presentation, McNaugher boldly stated that absolute energy independence is an unattainable goal. Shale oil development has certainly contributed to the revitalization of the U.S. economy, and has greatly enhanced America’s energy security. This burst in worldwide fracking activity has the potential to significantly increase global energy supplies. However, fracking at its current state has only modestly increased the supply of energy commodities. Oil fundamentally remains a global strategic commodity whose price is roughly determined by trends in supply and demand. Thus, we have not yet witnessed an energy “revolution” that would result in reduced dependency on oil-producing states, let alone complete energy independence.
The major policy-oriented accomplishment of shale oil development in the U.S., as McNaugher indicated, has been its capacity to more effectively carry out foreign policy strategies, such as imposing sanctions on Iran. McNaugher stated, “We’ve taken [Iran’s] oil off the market [and] we’ve brought more than that on the market through our fracking.” However, McNaugher highlighted that the U.S. should not rely too heavily on the geopolitical implications of such an energy revolution. For example, the United States has persistently attempted to exit the Middle East, and hopes that the increasing development and production of domestic energy sources will be a means of decreasing our dependency and involvement in the region. Yet, as McNaugher noted, the Middle East will continue to be of global strategic importance.
This panel on the policy implications of the shale oil revolution provided an appropriate conclusion to the symposium. Having drawn on the major themes discussed throughout the preceding four panels, Yost, Woertz, and McNaugher segued into a conversation regarding the implications such an energy revolution in the making hold for state-to-state relations and the trajectory of the global oil market.
Dr. Emad Shahin
Dr. Emad Shahin is a visiting professor of political science at the School of Foreign Service at Georgetown University and the editor-in-chief of The Oxford Encyclopedia of Islam and Politics. He is professor of public policy, The American University in Cairo (on leave). Currently based in the U.S., Shahin is also a distinguished visiting scholar at Columbia University. His areas of interests include Comparative Politics, Islam and Politics, Political Economy of the Middle East, and Democracy and Political Reform in Muslim societies.
Mr. Casimir Yost
Mr. Casimir Yost is a Professor at the Institute for the Study of Diplomacy at Georgetown University. He is teaching a graduate seminar in the School of Foreign Service entitled " Forecasting Global Trends," which draws on his work at the NIC.He is also writing and lecturing on the Middle East, East Asia and US foreign policy. In May 2013, Mr. Yost completed four years at the National Intelligence Council (NIC), where he directed the Strategic Futures Group. In this position he led a team of senior intelligence community analysts conducting integrated assessments of the strategic environment to identify emerging risks and opportunities for the United States. In May 2013 Mr. Yost was awarded the National Intelligence Superior Service Medal. Prior to his return to government service, Mr. Yost taught courses on American foreign policy in the Masters of Science in Foreign Service Program and directed the Institute for the Study of Diplomacy at Georgetown University from 1994 to 2008. While at Georgetown he was a consultant to the U.S. government. Mr. Yost has worked for the Asia Foundation in San Francisco and was President of the World Affairs Council of Northern California. From 1977 to 1986, he held staff positions in the U.S. Senate including with the Senate Committee on Foreign Relations. He also worked for Citibank in the Middle East from 1972 to 1977. He is a graduate of Hamilton College and has a Masters of Science in Foreign Service from Georgetown University. He is a member of the Council on Foreign Relations.
Dr. Eckart Woertz
Dr. Eckart Woertz is a senior research fellow at the Barcelona Centre for International Affairs (CIDOB). Formerly he was a visiting fellow at Princeton University, director of economic studies at the Gulf Research Center in Dubai and worked for banks in Germany and the United Arab Emirates. He teaches at the Barcelona Institute of International Studies (IBEI) and was KSP visiting professor at the Paris School of International Affairs (PSIA) at SciencesPo. He is author of Oil for Food (Oxford University Press 2013) and editor of GCC Financial Markets (Berlin: Gerlach Press 2012). He holds a PhD in Economics from Friedrich-Alexander University, Erlangen-Nuremberg and can be followed on Twitter @eckartwoertz.
Dr. Thomas L. McNaugher
Dr. Thomas L. McNaugher is a Senior Visiting Professor in the Security Studies Program of Georgetown University’s School of Foreign Service. He arrived at Georgetown in the summer of 2011, after sixteen years at the RAND Corporation, where, among other things, he directed RAND’s Center for Asia Pacific Policy (2008-2011) and the RAND Arroyo Center, the Army's federally-funded research institute (2001-2007). He was a policy analyst at the RAND Corporation from 1977 to 1981. From 1981 to 1995, Dr. McNaugher was first a Research Associate and then a Senior Fellow in the Foreign Policy Studies Program of the Brookings Institution. He has been an adjunct professor at the School of Advanced International Studies (SAIS), is a member of the Council on Foreign Relations, and is on the editorial board of Joint Forces Quarterly.
As an active duty Army officer from 1968 to 1975, CPT McNaugher served in the Republic of Vietnam from 1970 to 1971. As a mobilized Army Reservist, LTC McNaugher participated in Operations Desert Shield and Desert Storm on the Arabian Peninsula from December 1990 to May 1991. Colonel McNaugher retired from the U.S. Army Reserves in January 2000.
Dr. McNaugher received a BS degree from the United States Military Academy and an MPA and PhD (in Political Science) from Harvard University. His books include The M16 Controversies: Military Organizations and Weapons Acquisition (Praeger, 1984); Arms and Oil: U.S. Military Strategy and the Persian Gulf (Brookings, 1985); and New Weapons, Old Politics: America's Military Procurement Muddle (Brookings, 1989).