The Shale Revolution and Donald Trump

Thanks to benign neglect on the part of government, private and commercial endeavors in the United States have revolutionized the global energy sector. As luck would have it, North America is as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. Now, if only Trump can be stopped from squandering all this good fortune.

Foreigners have long had an in-joke (probably incorrectly attributed to Otto von Bismarck) about America’s obliviousness to its own fantastic luck: “God protects Fools, Children, and the United States of America.” There is a modern technological corollary to Bismarck’s Law of America’s great good fortune. Despite the fact that European elites are clearly as well (or better) educated as their American counterparts, the United States nevertheless monopolizes the game-changing innovators of the modern world. Why is that the people launching whole new cutting-edge industries out of nothing all come from the US? America has Alexander Graham Bell, Thomas Edison, Henry Ford, Bill Gates and Steve Jobs to its credit. This is an innovative first team unmatched in modern history. To many outsiders, this is just another sign that America (perhaps unfairly) is smiled upon by the gods.

Frankly, in Bismarck’s supposed quote, there is more than a little envy at work. Yes, America has been blessed by great good fortune, but as my new book, To Dare More Boldly: the Audacious Story of Political Risk, makes clear, farsighted visionaries have made the most of it. For there are numerous practical reasons for the United States’ “luck” in terms of innovation. One of them revolves around a tale I tell often: while the American government did little to sponsor Henry Ford or Steve Jobs, at least they left them alone—to the benefit of all.

Picture Steve Jobs and Steve Wozniak, tinkering away in a garage, perfecting the personal computer: they simply could not have done so in Europe. Given the continent’s infinite rules and regulations, working in a garage would have been forbidden, being considered an “unsafe workspace”. Yes, the more we look at America’s luck, the more the story regarding fabled Red Sox slugger Ted Williams comes to mind. Late in his career, Williams had a lucky bounce of the baseball and found himself with an undeserved hit. A rookie said to him, “Gee, Mr. Williams, that sure was lucky.” The dour Hall of Famer replied, “The more I practice, kid, the luckier I get.”

Americans’ advantage is that they have been allowed to practice, to tinker at things, to dream and to make those dreams come true, with the government (at its best) merely shrouding them in benign neglect. The country’s genius has not been primarily located in the public sphere—I can name many more bad presidents than good ones—but rather in the practical wisdom that if government leaves its people alone, their private, commercial genius will drive everything.

We who practice foreign policy analysis have an in-built bias towards public and governmental—rather than private and commercial—actions. It is what we have grown up studying and assessing, and where we are at our most comfortable. But such a statist interpretation of the world does not begin to fully explain a country such as America, with its genius for non-governmental, commercial solutions.

The game changer

The shale revolution that occurred during the time of the Obama administration is a case in point. Fracking (or hydraulic fracturing)—that is, using water and other liquids at high pressures to far more efficiently and cheaply force residual oil and gas to the surface through existing ssures—has utterly transformed the global energy industry. And thanks to the federal government’s benign neglect, wells and whole fields of gas and oil that had proven uneconomical just years before were made viable across the American West, from Texas to North Dakota. This was a private, commercial engineering initiative that evolved over decades, and all without much governmental involvement—or interference. This revolution and its fruits have landed squarely in Donald Trump’s lap—making him look lucky. President Trump’s energy strategy is, in truth, entirely beside the point; it is the private, commercial shale revolution that matters for America and the rest of the world.

It is almost impossible to overestimate the importance of the shale boom. The numbers tell the tale and they amount to a revolution that has almost incalculable geopolitical and macroeconomic consequences for a world that has largely missed its monumental significance. With the advent of fracking, US oil production has increased 80% over the last decade. The US Department of Energy estimates that in 2018 American production levels will reach 10.3 million barrels per day (mb/d), besting the all-time record set in faraway 1970. Of this, fully 2 mb/d will be exported. The gas industry is being revolutionized too. By 2015, more than half of all gas produced in the United States came from shale.

Nor is the shale boom a flash in the pan. The US Energy Department estimates that America has enough shale gas reserves (coupled with oil and other gas resources) to last for two centuries. Quite amazingly, the International Energy Agency (IEA) forecasts that US oil production is set to top that of energy superpowers Saudi Arabia and Russia in 2018, with more than 80% of global energy supply growth likely to come from the US in the next decade. Staggeringly, by the 2020s, the IEA expects North America to be self-sufficient in energy.

This revolution and its fruits have landed squarely in Donald Trump’s lap—making him look lucky. President Trump’s energy strategy is, in truth, entirely beside the point.

The Permian Basin in west Texas, accessed through the fracking engineering revolution, is estimated to have as much oil beneath it as Ghawar, the largest field in Saudi Arabia. Further, the oil is far cheaper to extract than are the riches in most OPEC countries. Almost overnight, the United States has risen phoenix-like to transform itself into one of the global big three (along with Russia and Riyadh). The US has gone from energy mendicant to determiner of the global price of energy in the blink of an historical eye.

It would seem Bismarck’s Law holds regarding America’s endless luck. Just a few years ago, everyone thought the US would be forced to import energy for the foreseeable future, with all the geoeconomic and geopolitical risk that entails. Suddenly, seemingly magically, America finds itself one of the major energy producers of the world.

The Saudi’s Rockefeller gambit

There are two great geoeconomic takeaways from the advent of the shale revolution. First, the Saudis (until now the world’s primary energy superpower) have not succeeded in killing the shale revolution at its birth. Nothing can stop it now. Second, in trying to do so, Saudi Arabia unwittingly made shale the new ceiling for global energy prices for the foreseeable future.

Initially, the Saudis attempted to kill shale, playing a version of a very old business game. Their John D. Rockefeller energy strategy—named for the late nineteenth/early twentieth century oil monopolist who forced overall oil production up (taking a temporary loss) and prices temporarily down in service of the greater goal of driving his competitors out of business and thereby boosting his overall market share over time—failed to work. While the price of oil plummeted a dizzying 70% from its June 2014 highs of $120 a barrel to a trough of just over $30 a barrel, shale did not throw in the towel.

Constant shale productivity gains meant that US output fell only moderately, from a still impressive total at the time of over 9 mb/d. Also, turning shale wells on and off is far less expensive than doing so with the fixed-rig wells in Saudi Arabia and the rest of OPEC, making shale more price sensitive. The Saudis were forced to suspend their game of energy chicken, and ended up giving in to the inevitable: with OPEC (and with the help of an equally hard-pressed Russia) they reversed course, cutting production frantically to limit the financial damage to its members.

The September 2016 OPEC deal to cut oil output amounts to nothing less than Saudi Arabia’s surrender to the power of American shale.

The self-inflicted wounds of Riyadh’s Rockefeller strategy drove the Saudis to economic extremes unthought-of in recent years. In 2015, the Saudi budget deficit amounted to $98 billion, or a whopping 15% of its GDP. While Riyadh has mountainous reserves, it needs the price of oil—the sole motor of its economy—to fetch around $85 a barrel to adequately finance public spending. Despite significant price increases of 35% over the last six months of 2017, this figure is still barely on the horizon today.

While the temporary anti-shale Russian-Saudi alliance, first put in place in September 2016, has proved remarkably durable—with both powers agreeing to keep cuts of 1.8 mb/d in place until the end of 2018—it is now clear that nothing will be able to put the shale genie back into the bottle. A year on from the deal, shale production had actually increased by a very healthy 10.8%, year on year. While the Russia-OPEC deal has put a floor on the global energy price of around $50 a barrel, the shale revolution has surely put a ceiling on the global energy price, meaning energy prices will travel in a far narrower band than in the past.

Unwittingly, the Saudis have made the Americans the new global energy swing producer, fixing the permanent ceiling for the global price of oil.

The Saudi sisyphus and the end of an era

The young, feckless Crown Prince Mohammed bin Salman (MBS), has blundered: employing Saudi Arabia’s John D. Rockefeller strategy to permanently drive us shale out of the energy market has led to the exact opposite result. Unwittingly, the Saudis have made the Americans the new global energy swing producer, fixing the permanent ceiling for the global price of oil. Just as prices inevitably rise due to Saudi and Russian cuts, so do more shale wells come online, thereby stabilizing the global energy price. Like the mythological Sisyphus, mbs will roll the boulder of energy price increases up a hill, only to have it perennially tumble down as shale production increases in turn, over and over again.

This, in its way, is as momentous a shift in global power as the stunning Brexit and the Trump political ructions. Whereas Brexit highlights a Europe in absolute decline, and whereas President Trump’s election brings to an abrupt end seventy years of American global ordering power, the Saudi’s meek surrender brings the long age of OPEC domination of the world’s energy market to a close. The year 2016 truly saw the death of one world order, and the uncertain birth of another.

Boundless geopolitical riches

Coupled with the tar sands energy boom in Canada and the liberalization of Pemex, Mexico’s heretofore state-controlled oil company, North America now stands as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. If properly grasped, this is a geopolitical treasure almost beyond measure. Imagine the decrease in political risk if, rather than having to focus primarily on the chaos of the Middle East in order to secure its energy supplies, the United States could concentrate only on Mexico and Canada.

The second great geostrategic benefit flows from the first. For the first time in modern history, the US will not have to worry so much about the Middle East (and with such tragic results). Indeed, from late 2016 to late 2017, American imports from OPEC decreased a significant 20% due to the shale revolution. At last, a policy of off shore balancing vis-à-vis that snake pit of a region—the graveyard of many a presidency—is possible.

Third, the shale boom will dramatically turn the US into a net exporter of energy, able to use its exports as a geopolitical tool. This strategy involves supplying hard-pressed Eastern Europe with more of its energy needs over time (as of April 2018, Moscow accounts for fully one-third of Europe’s gas needs), so they are no longer at the tender mercies of the Russians. This will decrease the Kremlin’s sway over Europe as a whole.

The shale boom will also make it possible to entice energy-starved China into buying American exports. Over time, this newfound dependence would help keep the Asian giant from emerging as a revolutionary power, as it is unlikely that Beijing would want to come to blows with a vital energy supplier. It also makes the possibility of a full-blown Sino-Russian alliance—the only power configuration in the near term that can challenge US global dominance—far less likely.

The confounding of Bismark’s law

No amount of luck—even paired with the genius of leaving people alone to be creative—can survive disastrous statesmanship. The defiantly wrongheaded foreign policy of Donald Trump therefore puts at great risk almost every geostrategic treasure offered up to the US by the shale revolution.

First, in threatening the future of the wildly successful Nafta accord, the Trump White House endangers not just the significant continental gains made so far, but also imperils the glittering prospects of North American consolidation of near-energy independence in the medium term. After all, neither Mexico City nor Ottawa will likely want to formalize consolidating energy ties with a US that has shown itself to be such a fickle and unreliable economic partner.

Second, the same goes for the White House’s threatened trade war with China. There is no doubt that Beijing has not played fair in many ways in terms of its trading regime—from habitual intellectual property theft to endowing lavish subsidies on state-owned enterprises. However, by unilaterally threatening up to $150 billion in tariffs (and actually imposing a 25% tariff on Chinese steel and a 15% tariff on aluminum) the Trump administration is not taking the longer-term picture into account. To put it mildly, Beijing, so ripe to be won over due to its pressing energy needs and the advent of US shale, will hardly turn to the United States for its long-term energy supplies in the midst of a trade war. The geostrategic losses could be incalculable.

Third, by ignoring the Obama administration’s efforts to extricate the US from the cesspool of the Middle East and, instead, by reverting to form in mindlessly supporting Saudi Arabia, President Trump has increased the American footprint in a region when it is both unnecessary (offering little strategic gain) and highly perilous. The US fiddles in the Middle East while the primary geostrategic arena has decisively shifted to Asia: most of the world’s future growth will come from the latter region, along with much of its political risk. The shale revolution provided the United States with an elegant reason to truly pivot away from the Middle East, yet sadly—and for no gain— this opportunity is being tragically ignored.

There is absolutely no doubt that Bismarck’s law holds. Through a combination of great good luck and the skill of believing in the genius of its people, the United States has been given the Holy Grail that is the shale revolution. The tragedy is that all this good fortune is being squandered by a president who remains resolutely determined not to let facts get in the way of his theories.

John Hulsman © Aspen Institute Italia 2018. This article originally appeared in Aspenia international 79 “Charging ahead: the energy transition”. www.aspeninstitute.it