While the Organization of Petroleum Exporting Countries (OPEC) will likely be unable to defend its position on both market share and prices in the wake of growing U.S. tight oil supply, growth in non-OPEC supply does not mean the United States will be immune from a disruption of Saudi Arabian oil exports, a policy expert told attendees at a June 12 forum at Rice University.
The U.S. shale boom changed the perception that Saudi Arabian Oil Co. (Saudi Aramco) would dominate the global oil supply, shifting the center of the energy world back to America, said Amy Myers Jaffe, executive director for energy and sustainability at the University of California at Davis, at the Energy Market Globalization: Investment and Commodity Price Cycles and the Role of Geopolitics.
Jaffe referenced a Wood Mackenzie study that estimates $80 billion will be invested in 2015 in North America tight oil plays as new pipelines and refinery upgrades transform the U.S. energy landscape. U.S. liquids production also could potentially keep growing, with some estimates has high as 10 million barrels of oil per day. While Jaffe is not sure she agrees that production will rise as high as 10 million bopd, the production trendline is definitely up, with initial estimates of 3 million bopd looking "very achievable".
Saudi Arabia may find itself swimming upstream if it decides to defend its position on price, given the decline in miles that Americans are driving due to the recession but also to generational and lifestyle choice factors and its impact on U.S. oil demand.
But while Saudi Arabian production could be used to replace exports from a neighboring country if a disruption occurred, no substitute exists for Saudi Arabia oil supply if a disruption of exports occurs, Jaffe noted. And a disruption of supply is possible, given that several worst case scenarios – including the strain of unemployment, citizens' anger over government corruption and fear of arrest by secret police – have already occurred in the Middle East.
The presumption that the Arab Spring could not spread to the Persian Gulf as it did through Tunisia, Egypt and other countries is not an accurate, Jaffe noted. Like other countries that experienced the Arab Spring, the Persian Gulf region suffers from the same issues that sparked revolt in other countries. These trends may not be true of very small Persian Gulf countries, but is true of larger nations, Jaffe said.
With Saudi oil exports, Jaffe sees an instantaneous reversal of economic recovery and a possible financial and banking crisis worse than the previous crisis. Jaffe anticipates a huge U.S. response would result from a disruption of Saudi exports, including greater investment in master limited partnerships MLPs to finance U.S. shale play activity, increased use of alternative energy sources, including natural gas in transportation and wide adaption of the Millennial generation lifestyle. Jaffe described Millennials as urban dwellers who believe in telecommuting, living local and distributed energy, and who would be perfectly happy without fuels or cars.
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