The American oil and gas industry combines the use of massive capital, cutting-edge technology, entrepreneurial audacity, international economics, and geopolitics like no other. Corporate strategy is a daily fact of life. Companies which mostly operate domestically have increased US production by over 4 ½ million barrels per day. This has been a boon to the US economy by reducing imports and the flow of dollars out of the country. This production increase was an economic and political surprise and has become a de-stabilizing force in the international oil markets. US companies which operate internationally are responsible for most new discoveries, increases of production worldwide, and most of the technological improvements which lead to growth in the industry everywhere. US oil companies thus have a significant impact on the world’s oil supplies, markets, and prices and, due to the size and critical nature of the oil markets, also on international geopolitics and geo-economics.
But who is taking advantage of the current situation and taking action to improve their control and influence in the international oil supply and financial systems? Recent news items since my last commentary provide the answer:
Russia making deals in Egypt, Morocco, Libya, Saudi Arabia, Jordan, Turkey, Argentina, and Israel, all former allies of the US except Libya. Is there a pattern here? Obviously Mr. Putin has a strategy and his companies and government agents are carrying it out. US foreign policy seems to be adrift, however, with no defining strategy or coordinating oversight. Each component of policy seems determined and implemented in isolation with no knowledge or consideration of its influence on a broad strategic program.
The Federal Reserve oversees the banking industry. As noted in previous commentaries, their actions starting and stopping Quantitative Easing caused significant oil price increases and decreases; for example, the significant oil price drop in late 2014 started when Quantitative Easing was stopped by the Fed in August 2014. Saudi Arabia did not announce they would maintain market share until the end of November and increases of storage started in first quarter 2015. An earlier commentary also included an inverse correlation between oil price and the value of the dollar.
In March 2015 the Fed Chairman testified to Congress that she was surprised by the change in the price of oil and about 30 minutes later that she was also surprised by the change of the strength of the dollar – interrelated results of actions taken by the Fed. The real surprise was to learn the Federal Reserve Chairman did not realize the Fed’s actions affect the international value of the dollar and the oil price.
In a country which still depends on imports for about a third of its oil needs, Treasury officials recommended selling off half the Strategic Petroleum Reserve over a period of several years to raise money for the general fund of the country; an idea which may make sense from a short-term budget viewpoint but not strategically for long-term security in a dangerous and changing world.
After the end of the Cold War the US, Europe, and international institutions seemed to embrace globalization as the means to bring prosperity and equality to the world’s peoples. Twenty-five years later it has become apparent that such a world will not be achieved by bringing 6 billion of the world’s poor up to the standard of living of the world’s rich nations. Equality will be achieved only by bringing everyone to the mean, which is quite low; the most prosperous societies must come down in status and wealth significantly.
This result of globalization became apparent to middle class American voters as they saw their prosperity, culture, security, and well-being eroded for an ideological objective. The US, with Europe, slowly sacrificed the prosperity of its middle class on the altar of equality domestically and internationally. The US has supported the phenomenal growth of China, fought fruitless wars on the other side of the world in an inconsistent fashion, and tried to convert Arabs into Jeffersonian democrats. American voters elected the only candidate, with all his quirks, shortcomings, and idiosyncracies they thought had any chance of stopping all this.
Rejecting open unrestricted globalization as a foreign policy does not mean turning to isolationism; it does mean establishing a strategy for re-establishing and enhancing United States prosperity and security for its citizens and using trade selectively as a strategic tool.
A national strategy should direct and advise the integrated use of resources to generate wealth and the judicious and cautious use of power. By wealth I do not mean rich; rich is having a lot of money. Wealth is reliably having what you need when you need it. In a dangerous world, it is sometimes necessary for a government to take forceful action to safeguard the safety and security of its citizens. The power to do that should be used rarely and carefully but it must be available as needed. This means the resources needed may be indigenous to the nation or externally acquired but they must be reliably accessible in a useful form on demand. Any reduction of ready accessibility for short-term financial benefit must be avoided.
A purpose of these commentaries is to point out that during the Energy Crisis Decade of Confusion from 1973 to 1983 many us policy choices were based on lack of understanding of the oil industry and oil markets. Many of those policies were disruptive and counterproductive and we still live with some of them. During this current period of transition of international political, economic, financial, and energy systems we are in danger of making the same mistakes based on lack of understanding of the current oil market and price system and its interconnection with the international financial system.
The United States is a large oil producer but does not produce enough for its own needs. Currently it imports oil purchased in a worldwide fungible market with marginal pricing quoted on open exchanges. A significant part of that worldwide oil market and supply system is in unstable regions; it is affected by myriad participants, events, confrontational politics, and ongoing wars. Prices reflect these events and various rumors, fantasies, bad data, and perceptions of impending shortages or surpluses. The market and pricing are volatile and not conducive to the long-term capital requirements necessary to develop new oil supplies. Oil supplies are adequate but are not reliable with respect to either availability or price.
As a large and critical resource, oil must be considered when formulating strategy and foreign policy. Those who make and guide US foreign policy and financial policy have the opportunity to take advantage of the unexpected strength of the American oil industry but do not seem interested in doing so. US oil companies could be powerful tools of financial and foreign policy – and have been in the past – if their activities were conducted with any coordination as part of an overall strategy of the US Government. They have established an unexpected advantageous position for the US in geopolitics and geoeconomics but other countries are taking advantage of it. As an example, it is noted that large gas fields discovered in the Mediterranean offshore Israel were discovered by American companies but Russian companies are negotiating with the Israelis and likely will control the transportation of this gas to Europe. Other countries coordinate their oil companies’ activities with government actions for strategic benefit. Our significant competitors are using their companies to establish dominating presences in many of the oil producing areas of the world.
The US needs a new reliable and stable oil supply and market system. The United States must develop a new foreign policy which is a part of an overall set of guiding principles for the government to operate in a troublesome and uncertain world. Individual policy components, political, military, financial, economic, and foreign, must be guided by people with an understanding of that for which they are forming policy, how it fits with other policy components, and coordinated into an overall national strategy. The national government must have a strategy overarching all these policy and strategic components. The recent increase of US oil production and its effects in international markets puts the US in a strong position to do so; it can re-align its international relationships politically, financially, and economically from a position of strength and confidence.