This is an audio transcript of the Behind the Money podcast episode: ‘How shale rewrote the global oil order’
Michela Tindera
Let’s go back to the 1970s and think about oil and the global economy.
Myles McCormick
You had a scenario where the US was this kind of declining oil producer.
Michela Tindera
That’s Myles McCormick. He covers energy for the FT.
Myles McCormick
And all the geopolitical power when it came to oil, was largely centred around the Middle East, because that was where the bulk of the world’s oil was being produced and being exported from, and it was a growing source of oil.
Michela Tindera
Countries in the Middle East, members of Opec like Saudi Arabia or Iran, are pumping more and more oil, and western countries are consuming more oil, which means that they’re more reliant on that group of producers. This reliance becomes a problem in the 1970s. This is a turbulent time in the Middle East, from the Arab-Israeli war to the Iranian Revolution, and this turbulence causes oil prices to spike.
Myles McCormick
The events of the 1970s just made it clear globally to politicians, to traders, to analysts that the countries in the Middle East had this huge sway over global oil markets.
Michela Tindera
Changes in oil markets affect the economy more broadly. And so this pattern continues for decades. Conflict in the Middle East leads to a spike in oil prices and fear of global financial fallout. That is until more recently.
Myles McCormick
First of April, there was a strike on the Iranian consulate in Damascus that was blamed on Israel, kind of escalating the conflict in the Middle East.
[NEWS CLIP PLAYING]
Myles McCormick
Conflicts like this in the past, you would have expected there to be a massive reaction from the price of oil. I mean, this is the two biggest military powers in the Middle East going at each other’s throats. You would expect oil to spike, but it didn’t. The oil market effectively shrugged off what in other times had been seen as kind of a huge driver of price.
Michela Tindera
And Myles says this happened for one key reason.
Myles McCormick
Fundamentally, one word: shale.
Michela Tindera
Shale, that is US shale specifically. It’s flooded the global oil market recently. And Myles says that it’s had such a dramatic impact that it’s actually shifted oil’s production centre away from the Middle East.
Myles McCormick
Shale has effectively rewritten the rules of the global oil game. It just kind of transformed the world in a lot of ways. It transformed the geopolitical balance of power.
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Michela Tindera
I’m Michela Tindera from the Financial Times. Despite the recent escalations in the Middle East, US shale has been a driving force in keeping today’s oil prices steady. Today, on Behind the Money, we’re diving into how shale has rewritten the rules of global oil and how long these new rules will stay in place. Hey, Myles. Welcome to the show.
Myles McCormick
Hey, Michela. Great to be on.
Michela Tindera
All right. So to kick things off, shale is playing this key role in keeping oil prices steady right now. But can you just tell us you know, what is it? What is shale?
Myles McCormick
So when we talk about shale, we’re talking about these kind of brittle rocks that contain oil and gas. And if they can be fractured open using the right kind of technology and methods, then it provides a new trove of hydrocarbons to be accessed.
Michela Tindera
How is it different from crude oil?
Myles McCormick
It’s not. It is crude oil. So shale is the rock and rock formation, but the actual hydrocarbons that come out are the same that you would be extracting using traditional methods.
Michela Tindera
OK. So the US is producing a lot of this. How much are we talking.
Myles McCormick
So the volume of oil the US is now producing is over 13mn barrels a day. And that’s a massive ramp up from about 5mn barrels a day less than two decades ago. So it’s the most oil the US has ever produced, but it’s also the most oil that any country in history has ever produced.
Michela Tindera
Wow. So how exactly is this ramp-up in US production playing a role in insulating global oil prices?
Myles McCormick
Ultimately, it all comes down to a question of supply. I mean, you have these huge volumes of oil now coming from a western country that is not in conflict or is not as exposed to the potential for conflict as some of these Middle Eastern nations that the world relied on for its oil production historically.
Michela Tindera
To understand how the US got to this dominant position. We need to go back a couple of decades to when the seeds of this shale revolution, our first planet.
Myles McCormick
In the early 2000s, oil drillers in different kind of wild reaches of America started using two new techniques. One hydraulic fracturing or fracking, which is effectively pumping huge volumes of water and chemicals and sand into the earth to try and create fissures in this shale rock and unlock the previously unreachable oil or gas inside it. And the second method is what’s known as lateral drilling. So rather than drilling just straight down, you’re drilling down and then horizontally, and these horizontal wells can go on for as much as three miles. So you’re unlocking a huge volume, more oil or gas than you might previously have been able to reach.
Michela Tindera
These techniques are more unconventional compared to traditional oil drilling methods.
Myles McCormick
Once these techniques started being used, they increasingly became widespread and drillers started deploying them in different shale basins around the country, from Texas to North Dakota to Pennsylvania to Wyoming. And so there developed something of a drilling frenzy. And as a result, US oil and gas production just began to rocket.
Michela Tindera
By 2018, the US leapfrogged Saudi Arabia and becomes the biggest oil producer in the world.
Myles McCormick
And then a year later, 2019, the US becomes a net oil exporter. So it’s shipping abroad, more crude and petroleum products than it’s actually importing for the first time. So it just goes to show the shift over quite a short period of time, where the US was kind of moving from being reliant on foreign oil to being a key player in providing the international market with that oil.
Michela Tindera
And the same year that the US reaches net exporter status, something happens that clearly displays shale’s dominance in global markets.
[NEWS CLIP PLAYING]
Myles McCormick
The one example a lot of people will point to is in 2019, when there was an attack on the Abqaiq oil processing facility in Saudi Arabia. And this was kind of the nerve centre of Saudi oil production, and it’s the biggest processing facility of its kind in the world.
[NEWS CLIP PLAYING]
Myles McCormick
After the attack, oil prices spiked briefly, but then came right the way back down. And in previous decades, we would have expected this to have massive ramifications. But the non-reaction in the price of oil was the first kind of real concrete example that a lot of analysts will point to show that the balance of power had shifted geopolitically, that the US was now driving the market for the global oil price. So disruption in the Middle East just isn’t as much of a big deal as it might have been before.
Michela Tindera
And ever since then, America’s abundance of shale has served to stabilise global oil prices more and more. So it might sound like the oil market is safe from this volatility for good. But after the break, Myles looks at how long this US shale dominance will really last.
[FT NEWS BRIEFING TRAILER PLAYING]
Michela Tindera
Myles, we’ve established that the US is producing a ton of shale right now, but is that the only reason that oil prices have stayed somewhat steady throughout much of this recent conflict in the Middle East?
Myles McCormick
No it’s not. It’s not the only reason. I suppose the other kind of key reason is that traders are effectively betting that the conflict in the Middle East isn’t going to ratchet up too much further. Were things to get much worse between Iran and Israel, it could still create a big shock in the market. But what traders are assuming for the moment is that that won’t happen — that diplomatic efforts to contain the fallout are going to be successful — and that therefore any serious supply disruption won’t actually occur.
Michela Tindera
So what would have to happen for oil prices to make a dramatic shift again, where the US supply of shale wouldn’t be enough to insulate the market?
Myles McCormick
I suppose if there was a big material supply disruption that created a kind of an unseen shock to oil output, then shale wouldn’t be enough to contain it. I mean, shale can contain stuff from the margins. It can contain kind of fears and worries of disruption. But if there was all-out war between Iran and Israel that hit oil infrastructure, then that would create huge chaos and cause a spike in the price of oil that, again, US shale wouldn’t be able to insulate the world from.
Michela Tindera
Right. And that has sort of happened in fairly recent memory with Russia’s full-scale invasion of Ukraine, right?
Myles McCormick
Yeah, absolutely. In that case, you had oil rocketing up to about $130 a barrel. And that was because Russia is still one of the world’s biggest oil suppliers. So the impacts of the conflict there on Russian supply could have been seismic. There was this kind of massive fear in global oil markets that there would be a huge disruption to global oil supply that didn’t really bear out over the subsequent months. So in some ways, shale did play a role and helped to depress the price back down then after that.
Michela Tindera
So it’s a presidential election year here in the US. How much do you see this new era of shale’s dominance in the oil market, playing a role in how Americans decide to vote this year?
Myles McCormick
I think this is a really kind of interesting point, because the price of oil in America is critical to any election, and there’s no more surefire way for Joe Biden to lose the presidential election in November than if oil prices were to spike, because a spike in crude prices would mean a spike in prices at the pump. So in the near term, it is essential from the point of view of Joe Biden that he keeps prices under wraps. You’ll see frantic shuttle diplomacy in the Middle East as the US tries to contain the fallout in the conflict between Iran and Israel. You’ll see probably pleas from the president for US drillers to pump more oil as prices ratchet up. So all of this kind of geopolitical tension could have very direct impacts on the election here in the US.
Michela Tindera
So if we step back and look at this moment in time, US shale’s dominance really has seemed to rewrite the playbook when it comes to global oil markets. But how long will it stay like this for?
Myles McCormick
I suppose there’s two kind of risks I’d highlight here. One is that the US shale patch oil drillers are less keen to rapidly ratchet up production, as they might have been 10 years ago. And that’s because there’s this new insistence from Wall Street that they return money to investors rather than embarking on an expensive drilling campaign. So the oil patch’s ability to respond to market forces is diminished somewhat. But I suppose the bigger and more existential one is how long the US shale revolution lasts. And a lot of analysts would tell you that it is in its twilight years now, because resources is running dry because of the aforementioned point about Wall Street not wanting them to spend, spend, spend. US shale production and US production generally will peak before the end of the decade and then will plateau and begin to drop off. So the US’s ability to keep pumping more and more and more oil will not go on forever.
Michela Tindera
So what will that mean for the global macroeconomic picture?
Myles McCormick
US production won’t drop off a cliff. It will still be, for the foreseeable future, the world’s biggest producer. But as production does plateau and start to drop off, the role that ever-expanding production gave US on the world stage will start to diminish. I mean, as an example of that role, the US is like vast productions of hydrocarbons, has allowed it to slap sanctions on countries around the world that it previously would have kind of thought twice about, because the impacts on the price of oil. So it’s tightened up sanctions on Iran recently, it slapped new sanctions on Venezuela and Russia. These are steps that it wouldn’t necessarily have been able to take if it wasn’t such a kind of a behemoth of an oil producer. So it’s advantages in areas like that will start to slide as production starts to slide.
Michela Tindera
So this shale revolution, as you said, it’s not gonna last forever. What do you think that means for the future? The future geopolitically speaking and the future in the global economy?
Myles McCormick
Well, I think this kind of depends on the extent to which we are reliant on oil. If the US is successful in weaning itself off oil, at the same time that the shale revolution kind of peters out and production starts to fall, then it doesn’t matter as much because we’ve got new forms of energy. But if the US remains addicted to oil. To quote George W Bush, then it becomes problematic if its own production starts dropping off and it needs to remain reliant on a more volatile Peres on the far side of the world.
Michela Tindera
Myles. Thanks for being here.
Myles McCormick
Pleasure being on. Really enjoyed the chat.
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Michela Tindera
Behind the money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Our contributing producer is Max Johnston from Goat Rodeo. Special thanks to Derek Brower. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
