America Strikes Oil, Literally And Figuratively

Thursday, March 26, 2015
Image credit: 
Poster Collection, US 6138, Hoover Institution Archives.
Image credit: 
Poster Collection, US 6138, Hoover Institution Archives.

J. Paul Getty advised young people to rise early, work hard, and strike oil. It was the recipe to success for many an American robber baron of the nineteenth century, a fortune in both senses of the word being made all over again as hydraulic fracturing enables American energy production to burgeon. American energy production is advancing our national security, as well, emboldening our friends and impinging on our enemies.

Energy is yet another modern proof of America’s economic dynamism, springing as it does from technological inventiveness, amenable geology, venture capital availability, a swarm of wildcatting small operators, geographic mobility in the labor force, and local control of mineral rights. In July of 2013, the United States surpassed Russia as the world’s largest producer of oil and natural gas, with 22 million barrels per day of combined oil and gas production.1

Not only is energy production good for our country’s balance of payments, energy prices for all consumers have plummeted by half as our reduced imports free up quantity, even reducing the cost of coal. So the American bonanza of energy production is benefitting others as well as us.

Initially, the shale revolution is predominantly helping and hurting all the right countries: Russia, Venezuela, and Iran are all struggling because state finances rely almost entirely on energy production. All three lack the rule of law and global connectedness necessary to produce economic vibrancy. With inflation running 60% in Venezuela, its economy is teetering. 2

Europe’s previous dependency on Russia became a glaring vulnerability with Gazprom’s thuggery in 2006; to its great credit, the European Union has used its competition law to force accountability on the seedy business practices of Mr. Putin’s quasi-state cabal. Falling energy prices bought Europe time to transition. The al-Sisi government—problematic in many other ways—has used the breathing room provided by falling prices to terrific advantage, reducing subsidies and freeing up Egypt’s markets.

Norway, another energy behemoth, not only has a diversified modern economy, but also wisely invested and scrupulously accounts for its sovereign wealth. America’s oil producing Middle Eastern allies also created sovereign wealth funds (although with less transparency) to diversify their economies, and are funding and promoting western education in the hopes of spurring greater entrepreneurialism and breadth. Mexico, seeing dramatic changes leaving behind their indigenous oil company, spurred market-friendly reforms; moving to consolidate North American energy production and distribution would give Canada, Mexico, and the U.S. a further competitive advantage. So governance turns out to be hugely important in building resilience for economies with heavy reliance on energy production or cost-inefficiencies related to energy use.

Energy markets are notoriously volatile; expanded production and fortuitous political events are incentivizing longer-term price declines, however. OPEC’s major producers are playing a complicated game of accepting near-term losses in order both to maximize the pain of sanctions on Iran, and also to make unprofitable further shale exploration and extraction. Nor will Russia cut production, desperate as it is for revenues as credit dries up due to U.S. and EU sanctions for its invasion of Ukraine.

China, Argentina, and Algeria all have larger natural gas reserves than does the U.S., but also greater impediments, either natural or governmental, to utilizing the resources. In China, for example, The Wall Street Journal noted that “from May 2010—when Shell was conducting early exploration in the region—to March 2013, the company lost 535 days of work across 19 wells due to ‘spontaneous village based blockades’ or ‘government requests to halt operations.3

And while the United States certainly has governmental obstacles—as President Obama’s veto of the Keystone Pipeline legislation once again underscored—it also has significant advantages over other potential gas providers. Infrastructure is more developed and transport distances shorter than for others. Legal predictability and enforcement, so important for companies making large, long-term investments, are lacking in Russia, China, and other potential producer countries. Most importantly, under American law, titleholders to land also own mineral rights, giving local communities a big incentive to accommodate the inconveniences and sometimes even danger of drilling, fracking, and transportation.

Becoming energy independent will not obviate American interest in the Middle East; its production will remain the price setter for energy markets. We will not be able to write off the Middle East. And even if Middle Eastern oil were irrelevant, its problems are not. America has a huge interest in whether the forces of moderation win those wars. The forces fighting for our interests and our values need our leadership and our active involvement if they are to prevail.

All of which means that the United States is likely to sustain its current politico-economic advantages—and be able to impose its preferred penalties—for a substantial period of time. Somewhere, J. Paul Getty is chuckling.

1. Russell Gold and Daniel Gilbert, “U.S. Is Overtaking Russia as Largest Oil-and-Gas Producer,” The Wall Street Journal, October 2, 2013.

2. Tim Bowler, “Falling oil prices: Who are the winners and losers?BBC News, January 19, 2015.

3. Brian Spegele and Justin Scheck, “Energy-Hungry China Struggles to Join Shale-Gas Revolution,” The Wall Street Journal, September 5, 2013.