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DAVID KRUSE

America first energy independence — part 2

August 11, 2017
Farm News

When I say that $70 barrel oil is the remaining barrier to total U.S. energy self-sufficiency, what I mean is that $70 barrel oil would provide the last piece of financial incentive to utilize the shale oil technology that exists to boost U.S. energy production past the finish line to total self-sufficiency. In the case of Natural Gas (NG) we are there now, already exporting Liquified Natural Gas (LNG) to compete with Russian NG in Europe and Persian Gulf NG in Asian markets.

Affordable NG is most of the reasons why the nitrogen fertilizer industry could invest billions in new fertilizer plants in the U.S. that will benefit cost of production for crops here. The cost of oil/gas production has been reduced for both conventional and shale production. Tar-sands and offshore oil supply in the Americas is essentially sitting on a shelf that can be reached for if the price of oil increases enough, creating a need to grab it. Currently only 20 percent of Canadian tar-sands potential is in production due to a lack of financial viability. There is no lack of energy supply in North America for the foreseeable future.

Crude oil prices in North America short of $60 barrel were enough to generate additional shale production to offset production cuts managed by OPEC producers and their partners that has sent crude oil prices back to the low $40s barrel. While OPEC and partners produce 40 percent of the world's oil their plan to reduce production was not enough change in output to move prices higher. They cut their production by 600,000 barrels/day and we boosted ours by 480,000. Actually, overall global oil production increased due to non-compliance from Libya, Nigeria, Iran and Iraq.

Oil is a global market with many players while energy resources are necessary for economic growth - something that has been worth fighting for. Shale development and North American energy self-sufficiency is a wrenching change for global geopolitics to adjust to. We are on the precipice of a transition that will ripple around the world resulting from our success attaining North American and U.S. energy self-sufficiency.

The Wall Street Journal reported that Iranian ships moving oil through the Persian Gulf were turning off their radio-signal tracking systems to cloak the origin of the shipments. Iran, as part of OPEC, agreed to limit oil sales as part of their effort to sustain prices. It is assured that Iran is exploiting any means, including masking the origin of their oil, to circumvent their agreements with the help of other gulf allies. That means that you have the Saudis actively attempting to exert both economic and political control of the region and its oil supply confronted by its primary enemy in the region - Iran.

In terms of U.S. energy security, the Mid-east no longer carries the risk for the U.S. that it once did. The U.S. is no longer dependent on Mid-east oil. Should conflict erupt in the Gulf region, oil prices would most certainly rise. The oil glut currently depressing global oil prices would evaporate quickly

The U.S. has done many things piecing together energy independence but it is shale production that has the potential to push the U.S. past the goal line upending the existing geopolitical balance along with economic potential. If the Middle East oil supply is disrupted by conflict it will no longer be a direct threat to U.S. energy supply.

One should not be complacent over current low oil prices. In the context of what appears to be a trend toward confrontation in the Middle East by opposing regional players, I fear waking up some morning and learning that missiles are flying and tankers are burning in the Gulf in an extended disruptive conflict in the region that interrupts the flow of oil/gas.

The U.S. would no longer have a strategic interest in becoming involved militarily in a regional conflict in the Middle East. Europe and Asia would be at significantly higher risk economically from the oil shock of higher prices with far greater strategic risk of shortages of supply developing from warfare in the region. Japan and China could be forced to compete with one another for the existing supply. That would include stepping up to protect the shipping lanes from the Middle East to Asia for crude. Given our independence from Middle East oil we would no longer have a dog in this fight.

It is probably a poor analogy but with the cat leaving, the mice will play and they will fight over the cheese. The U.S. will leave the mice alone in a fight over Middle Eastern oil. Japan and China have never gotten along and a new oil supply crisis will most likely sow the seeds of further conflict between them. There is a reason that China is building island fortresses in the South China Sea - it is to control the shipping lanes that transverse that region bringing oil from the Middle East as well as the primary commercial trade route.

Few are aware that Japan has the world's largest and most modern Navy second only to the U.S. China's naval power is much smaller. Japan has a deep-water Navy so can circumvent the South China Sea trade route. Japan's Navy has the capability of interdicting tankers coming from the Persian Gulf diverting them around China's zone of control. South Korea is most at risk from an oil war being forced at some point to choose sides. Japan? China? or Russia? It is possible that in a few years we will not even begin to recognize the old world order that is replaced by the new.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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