Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some Numbers

by Venu Gopal Narayanan - Apr 8, 2022 06:14 PM +05:30 IST
Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some NumbersUS President Joe Biden.
Snapshot
  • Now that American ambitions of becoming Europe’s main energy provider are declared, how might Biden’s new gamble play out?

    This grand plan is based on several factors. Here are the numbers.

Joe Biden’s grand plan for America to become Europe’s primary energy supplier is based on multiple factors. They include raising domestic American crude oil production from tight sands, reducing crude oil prices to the $60-70 per barrel band, and lowering inflation rates in America, while also leveraging heightened activity in the oil patch to boost the American economy.

All these factors are inter-related and can be quantified.

First: The European oil market. The top four consumers in Europe — Germany, France, Britain, and Italy — alone need to import around 5-6 million barrels a day. That is a substantial volume of demand which will remain for some years to come, in spite of Europe’s best efforts to transition from hydrocarbons to renewables and electric.

Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some Numbers

Second: America’s ability to meet that demand by increasing crude oil production from tight sands. As a chart below shows, America’s oil production, almost entirely from conventional geological formations, and through conventional modes of extraction, had been declining for decades.

By the turn of the century, this figure was down to under 5 million barrels a day. But that is when a spate of technological advancements, allied with better oil prices, gifted Americans the ability to start extracting oil from tight sands (also colloquially called ‘shale oil’). It was an expensive process, but as long as prices stayed above $60, producers would make a profit.

Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some Numbers

As a result, American oil production almost tripled between 2006 and 2018 (see blue line above, and note the steep rise after Donald Trump took over in end-2016).

Wallets bulged, the American economy soared, new markets for American crude were secured, and even Trump’s harshest critics had to admit that things were good.

But then the Wuhan virus pandemic set in, oil demand slumped, activity in the oil patch nearly came to a standstill, prices fell to unprofitable levels (to $40 and below), Trump lost the 2020 elections, and Biden took over.

The key metric to watch out in this period is the number of rotary rigs operating onshore in America (colloquially known as the ‘rig count’). If the number falls, there is a problem; if it rises, things are okay.

As a chart below shows, the American rig count fell off a cliff in March 2020 (maroon curve), as did oil production (blue curve).

Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some Numbers

Consumption was down, demand was down, spending was down, and so were prices. The rig count, which fell to under 300 — the lowest in decades — began to rise only in early 2021, when crude oil prices did. But even then, it was only at a sluggish pace. Indeed, the rig count on date is still only 600; a far cry from the thousand-plus which had drilled merrily away during the preceding decade.

This is where Biden’s problems began. Prices started rising consistently in early 2021, including, crucially, that of petrol, but demand, spending and economic activity didn’t — at least not commensurately.

By late 2021, inflation in America was out of hand. Oddly, though, it remained a taboo topic in the mainstream narrative, with Democrat loyalists and spin meisters resolutely adopting the ostrich position, and arguing that the inflation problem was Republican humbug.

And yet, the American government’s own Bureau of Labour diligently put out inflation figures, showing how scarily the consumer price index was soaring month on month. As a chart below shows, international oil prices started rising significantly from early 2021. This led to a rise in American petrol prices, and that, to inflation. Data never lies.

Can America Really Replace Russia And Middle East As Europe's Oil Supplier? Here Are Some Numbers

Readers may note the lag effects between the purple oil price, the orange petrol price, and the blue inflation curve.

This is when Biden tried his first gamble, of releasing strategic reserves in a bid to beat down the international oil price in November 2021.

When that didn’t work, he had no option but to engineer a more fundamental rupture, by attacking the root of the international crude oil price control mechanism. Russia had to become the pariah, if there was any hope of weaning Europe away from Moscow’s oil teat. And the patsy for that was Ukraine.

So, now that the deed is done, now that American ambitions of becoming Europe’s main energy provider are declared, and a baleful image of a malign Russia has been successfully crafted in the West, how might Biden’s new gamble play out?

Will he be able to set the oil price for the market he seeks to serve (in the $60-70 range)? Will he be able to ramp up tight oil production to requisite levels? Will he be able to give the American economy a massive fillip by increasing activity in the oil patch? And most importantly, will he be able to rein in inflation by reducing petrol prices?

Technically speaking, America can do it. It has the tight oil reserves, and the industrial capacity, to not just supply Europe 5-6 million barrels a day within the next 2-3 years, but offer at least half as much to China and India combined as well. That’s around 7-9 million barrels a day of domestic production.

This is where Biden’s decision to release 180 million barrels of strategic petroleum reserves comes into the picture. He is doing this to create storage space for the extra oil that is expected to be produced in the course of this year.

It may take the US another five years to become net oil exporters (while covering up for the natural, unavoidable decline in production from conventional sands), but if both price and market stability can be assured, your average Texan oilman will get the job done.

Regarding prices, a $60-70 band is something the world had become accustomed to, and it is enough for American tight oil producers to function profitably; meaning, there won’t be too many complaints on the price front.

American petrol prices would then return to their traditional $1-2 per gallon range, and with that, inflation too would come back under control.

But, there are a few problems:

First and foremost, no matter how good this plan looks on paper, we cannot forget that the world is still in the midst of an oil glut. That means there is a lot of spare capacity waiting in the wings, almost all of which is good quality oil with low production costs.

Second, no one seems to be factoring in Iran. For decades now, the country had been manacled by Western narratives, just so that it could be prevented from achieving its full oil potential. As unbelievable as it may sound, Iran has the capacity to produce 10 million barrels of oil a day, besides having the second largest gas reserves in the world.

Anyone seeking to contest this fact may recall that Iran had already achieved steady oil production levels of 7-8 million barrels a day as far back as the 1970s — without breaking a sweat! Now, if one geopolitical rupture could force a breach between Russia and Europe, who can guarantee that a counter-rupture would not bring Iran back into the game? And don’t forget that Iran has always been perfectly placed to supply cheap oil and gas to two of the largest consumers in the world — India and China.

Third, if anyone thinks that Russia and OPEC (Organization of the Petroleum Exporting Countries) are going to sit idly by, and lose market share to expensive tight oil from America, then they have another thing coming. (No wonder the news was recently abuzz with reports of the Saudi crown prince refusing to take Biden’s call).

This third point is the crux, which puts Biden’s masterplan in doubt: ceteris paribus, America will be able to manage everything except a price war. If the big exporters slash their prices (as Russia recently did, by offering their crude oil to India at heavily discounted rates), and there is very little American can do to deter buyers from accepting low prices (as America found it couldn’t, with India), then Biden’s latest gamble too, will flop royally.

The only way then, would be for the Americans to intervene and forcibly prevent such deals.

Anglo-Saxon bonhomie won’t last much further, either, than the first Middle Eastern offer of oil, at rates below which tight oil can be profitably extracted by Americans. And the same goes for gas from Russia; there is a price below which LNG from America will not be able to compete.

Therefore, it is difficult to see Biden enforcing his gamble in an equitable, peaceable manner.

Nonetheless, the good news seems to be that either way, oil prices should decline to reasonable levels before very long this year. That’s also probably when the Ukrainians will start asking the West why they were used this way, and forced to endure needless death, destruction and suffering.

So, whether Biden’s gamble works or not, the higher probability is that petrol prices would come down in America, along with increased economic activity, lower inflation, and significantly higher levels of crude oil production from tight sands. And Ukraine won’t get to join NATO.

Still, Biden would do well to remember the old adage, that in the end, a gambler’s luck always runs out, and the house always wins.

Also read: Biden’s Next Gamble Part-1: Supplying American Crude Oil To Europe

Venu Gopal Narayanan is an independent upstream petroleum consultant who focuses on energy, geopolitics, current affairs and electoral arithmetic. He tweets at @ideorogue.
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