St.

Francis College For Women

SHALE OIL:
THE NEW FORCE IN
GEOPOLITICS

Pillarisetty Simran
150722
BA III B (PPP)
International Relations
ABSTRACT:

Fossil Fuel is a highly political commodity and has more than once taken the centre of the stage
in international affairs. This is not surprising in view of its importance in industry and
transportation as well as for military activities. There is no debate as to the extent to which the
international community of nations is oil dependent. However recently there has been a shift in
trend of dependence on GCC & OPEC countries for crude oil imports to the rise in popularity of
the newly viable ‘Shale Oil’ from the United States.

The shale revolution and hydraulic fracturing known as “fracking,” already has had a profound
multidimensional impact. This essay seeks to discuss that shale oil has: • begun to radically shift
global energy markets and redraw the global energy map, forty years after the Arab oil embargo;
• altered geopolitics, making the Western Hemisphere—Canada, the United States, Mexico,
Brazil—the new center of gravity for oil and gas production and; • potentially repositioned the
United States vis-à-vis the Middle East and Asia.

Key Words: Shale Oil ; Geopolitics

Introduction:

Fossil Fuel is very important as it one of major sources of energy. It is vital to the world
economy and the world consumption of oil, driven by countries, is set to rise significantly. Oil
politics have been an increasingly important aspect of diplomacy since the rise of the petroleum
industry in the Middle East in the early 20th century.

Hydrocarbons these days, mainly in the form of crude oil, have developed the huge potential to
unsettle the world. The world has seen innumerable occasions when these organic compounds
were made to compound the miseries of common masses. These liquids have created a new
genre of oil wars or petro-dollar warfare. Oil has turned friends into foes and foes into friends.
Oil is increasingly used for power politics – domestically and on the international scale.

Mesopotamian oil was a crucial consideration in a number of the political settlements in the
Middle East after the First World War, with the French, British and Americans playing the
leading roles, just before that war the British navy had converted to oil, and Britain considered
the security of her oil supplies to be an important objective of foreign policy. She had no
domestic production.

In the 1920s the United States began to fear that her crude oil reserves were becoming
dangerously depleted and she also felt that her security as well as her prosperity depended on
obtaining control of crude oil abroad. The United States sought access to oil concessions in the
Middle East, and the diplomatic skirmishes were sharp as the British and Dutch tried to keep her
out, not merely from the Middle East, but from south-eastern Asia as well, where production was
dominated by the Dutch. Thus oil was an important source of controversy in the foreign policy of
a number of countries in the inter-war period.

After the war ended, Middle Eastern oil production surged upward. Gradually, American
dependence on Middle Eastern oil increased. During the 1950s, a combination of cheap fuel and
a burgeoning consumer culture led to an orgy of consumption. World oil prices were so low that
Iran, Venezuela, and Arab oil producers banded together in 1960 to form OPEC, the
Organization of Petroleum Producing States, a producers' cartel, to negotiate for higher oil
prices.
By the early 1970s, the United States depended on the Middle East for a third of its oil. Foreign
oil producers were finally in a position to raise world oil prices. The oil embargo of 1973 and
1974, during which oil prices quadrupled, and the oil crisis of 1978 and 1979, when oil prices
doubled, graphically illustrated a new era of international relations .Arab nations discovered that
their oil could be used as both a political and economic weapon against other nations.

The oil crises of the 1970s had an unanticipated side-effect. Rising oil prices stimulated
conservation and exploration for new oil sources. The sharp slide in world oil prices was one of
the factors that led Iraq to invade neighboring Kuwait in 1990 in a bid to gain control over 40
percent of Middle Eastern oil reserves.

Today’s risk of war and conflict are deeply intertwined with oil and energy affairs. Therefore,
oil, the fuel of globalization, might well be the force that could disrupt global peace and
prosperity-enhancing globalization. Russia’s recent military adventurism, Iran’s nuclear deal and
return to international oil markets, and China’s purported resource-seeking foreign policy have
put oil politics back on the global front burner

Oil as a strategic tool of International Relations

Fossil resources are generally distributed unevenly across our planet. For many years only a few
countries seemed to be blessed with large quantities of oil while others did not have their own
reserves. This disparity created a balance of power between countries with large crude oil
deposits, which are mainly organized in the Organization for Petroleum Exporting Countries
(OPEC), and most other states with little, insufficient or no own oil. OPEC countries hold more
than three-quarters of the world’s crude oil reserves and therefore have been able to dictate the
oil price for the last few decades.

Because of countries’ dependence on oil and the inability to “produce” oil (some countries will
never be able to extract their own oil as it simply is not available in all areas) oil is, among others
such as gas, but also wheat/grain and - to a certain extent - gold, a strategic commodity. Being a
strategic commodity, oil might just be as important from a political view than from a production
point of view. In some cases, merely knowing that “others” can dispose of it, can lead to
conflicting desires and political insecurity.

There are two key ways oil markets affect international relations. First, they shape the foreign
policy intentions of oil producing states, via the resource curse. By reducing domestic
accountability, oil income gives autocratic regimes an incredible amount of autonomy, meaning
a free hand in foreign policy. That allows them to engage in all kinds of military adventurism if
they are so inclined. The second way is more straightforward: oil booms provide money for big
military expenditures.

The old axiom has never been more true” “As flows the oil, so flows prosperity.” Everything
from a countries economy and currency exchange rate to their population’s over-all sense of
security and political stability seem to hinge precariously on what has come to be known as
“Black Liquid Gold!”The very political success or failure of any ruling regime and the very
survival of its citizens is dramatically affected, not simply by the mere possession of oil, but by
effectively controlling the price of this all important fuel.

Over the last ten years however, the established balance of power between oil exporting and oil
importing countries has been challenged. Since the United States started to use a new
combination of horizontal drilling and hydraulic fracturing, also known as ‘fracking’, to lift
tight-oil and shale-oil in the early 2000s, it has advanced to become one of the biggest oil
producers in the world.

The Importance of Oil in the American Economy:

The American economy is very dependent on oil and the United States is one of the most
important importers of oil in the world. The key role that that United States play in the oil
industry, as the largest importer of oil, is reflected in the fact that oil is always priced in US
dollars.
The population of the United States account for about 5 percent of the population of the world,
but it consumes about 25 percent of the oil that is used in the world every year. The daily rate of
oil consumption per person in the United States is about double the rate of consumption in the
European Union.

The importance of Arab oil to the United States was demonstrated by the events of the 1973
crisis, when the Arab world raised its oil prices, cut oil production and put an embargo in place
preventing the sale of oil to the US. This resulted in significant economic impacts in the United
States as the power shifted away from industrial countries and towards the oil producing
countries. The cost of oil in the United States rose dramatically in response to the price increases
and to the embargo on Arab oil.

The U.S “shale technology revolution” has undoubtedly been a major game changer in global
energy. Although it has only attracted attention relatively recently, in reality it has been over 30
years in the making.

The shale revolution in the US started in the 1970s, during what is known as the first ‘oil shock’
today – it was precipitated by the embargo by the Organisation of Arab Petroleum Exporting
Countries.During this time when pumps in the US were going dry, the seeds of what was going
to be the American shale revolution were planted via the Eastern Gas Shales Project in 1976 and
the Federal Energy Regulation Commission (FERC) research budgets for the Gas Research
Institute. But it was not until 1991, before the first shale drilling was done in northern Texas, and
not before 1998 that the first ‘economic-scale fracture’ using technologies specifically
developed for a domestic American shale boom was achieved.

Advances in the oil production technology, known as fracking, made it possible for many US
companies to produce oil and gas from shale and sandstone formations which were too difficult
to reach before. Additionally, abandoned oil fields were reactivated and new oil reserves were
discovered all across the United States. More or less overnight, the USA developed into one of
the world’s richest oil and gas reserves and even overtook Saudi Arabia as the biggest producer
of oil in 2014. This shale-oil boost in the USA fostered a national economic growth and changed
the balance of power in the oil business. The United States of America, which accounted for the
world’s biggest importer of oil for many decades, suddenly became the biggest rival of OPEC
Shale "Revolution": The US Energy Renaissance

Shale gas, along with tight sands and coal bed methane constitutes so-called unconventional gas
resources. These are natural gas resources trapped in deep, underground rocks such as shale rock
or coal beds . The resources are harder and more expensive to access than for example
conventional gas, but can be extracted using hydraulic fracturing, or "fracking", a method
whereby a mixture of water, sand and chemicals are injected into the rock formation under high
pressure, fracturing the low-permeability shale to release natural gas.

Shale rock is common in many parts of the world, and makes up an estimated 35% of the world's
surface rocks. Apart from the US, only a handful of other countries have commercially viable
shale prospects, these are China, Argentina and Canada. The success of these countries, will also
erase the US’s need to import liquefied natural gas (LNG) for the next 20 years .

There are several reasons why the development of shale oil and gas has taken off in the United
States. The United States is unique in that the owner of the land owns the hydrocarbon resources
underneath the property -- unlike elsewhere in the world where governments own subsurface
mineral rights. The oil and gas industry has access to capital and has abundant expertise with
U.S. geology. Regulations in the United States promote the development of oil and gas and
provide a stable and predictable permitting process. Finally, the U.S. benefits from having a large
infrastructure network able to handle the expansion of the oil/gas sector.

While the US has embraced fracking, some countries have opposed it completely, including
major economies in Europe – as the debate around environmental protection and climate change
gains global traction. In June, Germany, Europe’s largest economy that had also decided to shun
nuclear power, decided to ban fracking. Germany’s decision comes on back of its population’s
‘suspicion’ over the technology and its impact on the environment, specifically on drinking water
resources. Others such as the UK have also scuttled progress on fracking on its mainland,
with England banning frackingfrom 40% of its designated ‘shale’ areas and Scotland opting for a
complete ban. Other European states such as France and Bulgaria have also banned fracking
completely over environmental concerns. Thus US still remains the only country that has a very
successful shale economy.
Even though the US continues to import millions of barrels of crude oil per day', from 2005 the
country’s dependence on oil import has dropped from 60 % to 39 % thanks to shale gas. The
United States appears well on its way to self-sufficiency in oil and gas and may overcome Saudi
Arabia as the world's bigger supplier of hydrocarbons by 2020. Already, the country's increased
production is having an impact on the rest of the world.

The Geopolitics of Oil

Geopolitics is concerned with the relationship between geographical space (and to some extent
historical and social factors) and the power of nation states, specifically how the control over
territories and resources influences political power and political and economic outcomes. Power
is in turn defined as the ability to influence or control others' behavior

Energy independence has been the "the holy grail of American leaders over the past four
decades, from Richard Nixon to Barack Obama". Thanks to shale, that dream is closer than ever.
According to IEA projections, the US will in fact be energy independent by 2035. In geopolitical
terms, it would mean first and foremost a welcome end to the troublesome dependence on
countries such as Saudia Arabia, Iraq and Venezuela. The dependence on politically unstable and
authoritarian regimes is of course uncomfortable for US politicians, but also an issue of security.
George W Bush termed it "an urgent national security concern" .

It should also be noted that many of OPEC's principle actors actively use their energy politics to
uphold autocratic regimes though highly subsidized energy to own populations and generous
welfare regimes funded by petroleum revenue. The same revenues have bought influence in the
region: Qatar's support for Sisi's regime in Egypt and Iran's support for Hezbollah in Lebanon
and the Assad regime in Syria are some examples. It can be argued that for these countries, as is
the case for Russia, falling revenues represent a potential domestic destabilizing effect, and a
treat also to regional influence. In sum, countries relying on petroleum revenues for domestic
services and/or using energy for foreign policy purposes, especially when counter to American
interest, are likely to see their influence shrink.
The US's growing energy independence — largely the result of shale oil and gas — has the
potential to change the global geostrategic landscape, testing the country's engagement with the
world, including the Middle East and Europe. A self-sufficient US will likely have fewer
strategic interests in the Middle East and other sensitive, energy-rich parts of the world, and will
likely feel less vulnerable to developments beyond its borders.

The critical role of oil in shaping US foreign policy over the past many decades has now
drastically changed, altering the dynamics of the US’s international relations policies. In fact,
many of the country’s policies of engagement and dialogue with its traditional foes such as Iran,
Russia and Cuba are possible today because the US is close to achieving a significant milestone
for its economy and national security – energy independence.

Other effects of US Shale Energy include the diminishing ability of countries like Venezuela to
use oil to purchase votes at the UN and in regional organisations of small Caribbean states, and
Russia’s reduced ability to coerce its neighbours by threatening to cut off gas supplies. In short,
there has been a tectonic shift in the geopolitics of the world.

Geopolitical Implications

In geopolitical terms, the paradox of growing U.S. oil security is that it risks negatively
impacting traditionally safe Western Hemisphere exporters while providing expansion
opportunities for other countries seeking to step in large producing countries. The Following
actors have been affected by the U.S Shale Revolution:

1. Middle East & Shale Oil Boom

The energy revolution’s impact on international relations has been even greater, and
nowhere is it more visible than in the Middle East. For years, the foreign policy
establishments in both the United States and in capitals around the Gulf have insisted
shale production will not loosen the close ties between Washington and its regional allies,
especially Saudi Arabia.
Saudi Arabia’s leaders clearly feared their own alliance with Washington is being
downgraded as the Obama Administration pursued detente with Iran. Tensions between
Washington and Riyadh erupted into the open last year when Saudi Arabia declined to
take up its seat on the UN Security Council and undertook a series of other carefully
calculated diplomatic moves to signal its displeasure with the White House.

Such an open breach between the two close allies would have been unthinkable in 2005
or 1995 let alone 1985 or even 1975, when the United States felt its dependence on Saudi
oil exports keenly.Ultimately, it is the energy revolution that has emboldened U.S.
policymakers to pursue a very different course in the Middle East.

One of the main reasons why oil prices were near $120 per barrel a few years ago – and
then crashed to as low as $38 per barrel a few months ago – is the internal wrangling and
political hide-and-seek being played between the OPEC’s member countries, as well as
with its two prominent members and regional foes Saudi Arabia and Iran. Riyadh,
a Washington ally, has insisted, along with others, on not cutting down production from
its massive oil fields in order to protect its market share. This move, partly at least, is
aimed to unsettle the American shale economy at Saudi’s own expense, with Saudi taking
solid fiscal hits to its own economy.

Some people also worry about Saudi Arabia, which relies on oil for 70-80% of its budget
revenue. But the country still has over $600 billion in cash reserves and among the lowest
production costs in the world. Like Russia, Saudi Arabia has tightened its grip on
domestic politics as the oil price has fallen and its foreign policy has become more
assertive. It has also shown signs of accelerating reforms at home.

When oil prices were high, the Saudis socked away a massive trove of foreign reserves,
estimated at three-quarters of a trillion dollars. Now that prices have fallen, they are
drawing on those reserves to sustain generous social spending meant to stave off unrest in
the kingdom and to finance their ambitious intervention in Yemen’s civil war, which is
already beginning to look like a Saudi Vietnam. Still, those reserves have fallen by some
 $90 billion since last year and the government is already announcing cutbacks in public
spending, leading some observers to question how long the royal family can continue to
buy off the discontent of the country’s growing populace

This has forced the Saudi Leadership to reduce spending on gas subsidies, raising tax
revenue and cutting infrastructure spending. Falling receipts from oil exports could
trigger political upheaval. The demonstration effect of the Arab Spring in Syria and North
Africa is starting to embolden the people of these countries. They are no longer willing to
tolerate autocracy.

A weakening of the US-Saudi bond resulting from increased US energy self-sufficiency

along with diverging interests in the ongoing Sunni-Shia conflict in the Islamic world
could create a different set of circumstances. However, the effort to counter ISIS may
give new impetus to US-Saudi partnership.

2. China & Shale Oil Boom

Middle East oil producers are not the only countries that have been disconcerted by the
shale revolution. It is also altering the relationship between China and the United States.
In effect, the two superpowers have swapped places. In 1973, the United States perceived
its growing reliance on imported crude from the Middle East was a key strategic
weakness, while China’s rapidly developing Daqing super-giant oil field promised
greater energy independence.

Now U.S. reliance on the Middle East is loosening, while China is increasingly aware of
the risks of relying on importing oil from unstable parts of the Middle East and Africa via
long supply routes through the straits of Hormuz and Malacca and the South China Sea.

Once again, shale, and the energy revolution more broadly, lies at the heart of the
fundamental shift in the balance of power.China’s own policymakers attach the highest
 strategic priorities to developing their own domestic energy production (including from
shale), cutting energy consumption through improvements in energy efficiency, and
protecting foreign supplies by projecting diplomatic and military power into key supply
regions and along supply routes.

China’s interests in protecting its supplies are clear; its moves in the South China Sea are
also partially to protect its interests situated in the shipping routes of the Malacca Strait.
When it comes to the Middle East, China is building its first overseas military base in the
tiny African nation of Djibouti from where it will be able to protect its oil interests
travelling through the Persian Gulf .

The impact of petro-machismo is apparent in US relations with China. Between now and
2040, the IEA predicts, US oil imports will fall from 9.5 million barrels per day to 6.9
million, while China’s will rise from 5.0 million barrels to 14.2 million. This is a strategic
vulnerability for China that the US avidly seeks to exploit.

3. OPEC & Shale Oil Boom

The Organization of Petroleum Exporting Countries is an organization of 12 oil-

producing countries. It controls 61 percent of the world's oil exports and holds 80 percent
of the world's proven oil reserves. OPEC's decisions have a huge impact on future oil
prices. OPEC's first goal is to keep prices stable. It wants to make sure its members get
what a good price for their oil.

The US shale story is one of the premiere reasons why OPEC members have refused to
cut back on production. OPEC, a cartel like organisation which is used to having its own
way as far as control over global oil is concerned is now under turmoil due to US shale.

Fracking in the United States, has had a major effect on worldwide oil prices and has
lessened OPEC's influence on the markets. As a result, worldwide oil production has
increased and prices have dropped significantly, leaving OPEC in a delicate position.
OPEC decided to maintain high production levels, and consequently low prices, in an
attempt to push higher-cost producers out of the market and regain market share.

A cartel is able to hold its members only when it fulfills their objective of higher prices,
which has not been the case with OPEC. The member nations will now look to fulfill
their objective by cheating and acting individually, according to their requirement.

Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing
its clout in OPEC. Even in the current round of production cuts, most of the work is being
done by Saudi Arabia, whereas the other members are shying away from their designated
quotas. OPEC has far outlived the average lifespan of a cartel, but if the OPEC members
don’t regroup and act together, chances are that the cartel will come to an end very soon.

The current rout in oil prices threatens a profound shift in the geopolitical fortunes of the
major energy-producing countries. Many of them, including Nigeria, Saudi Arabia,
Russia, and Venezuela, are already experiencing economic and political turmoil as a
result. The longer such price levels persist, the more devastating the consequences are
likely to be.

In Nigeria, diminished government spending combined with rampant corruption

discredited the government of President Goodluck Jonathan and helped fuel a vicious
insurgency by Boko Haram, prompting Nigerian voters to abandon him in the most recent
election and install a former military ruler, Muhammadu Buhari, in his place. Since
taking office, Buhari has pledged to crack down on corruption, crush Boko Haram, and --
in a telling sign of the times -- diversifythe economy, lessening its reliance on oil.

Venezuela has experienced a similar political shock thanks to depressed oil prices. When
prices were high, President Hugo Chávez took revenues from the state-owned oil
company, Petróleos de Venezuela S.A., and used them to build housing and provide other
benefits for the country’s poor and working classes, winning vast popular support for his
 United Socialist Party. He also sought regional support by offering oil subsidies to
friendly countries like Cuba, Nicaragua, and Bolivia. After he died in March 2013, his
chosen successor, Nicolas Maduro, sought to perpetuate this strategy, but oil didn’t
cooperate and, not surprisingly, public support for him and for Chávez’s party began to
collapse. On December 6th, the center-right opposition swept to electoral victory, taking
a majority of the seats in the National Assembly

The major oil-producing countries also face the prospect of political turmoil,
including Algeria and Angola. The leaders of both countries had achieved the usual
deceptive degree of stability in energy producing countries through the usual oil-financed
government largesse. That is now coming to an end, which means that both countries
could face internal challenges.

4. Importer Countries & Shale Oil Boom

India imports about 80% of its oil needs and more than 55% of its natural gas
requirements. Along with South Korea, China and Japan, India still depends and will
continue to depend on foreign oil. Both China and India are expected to see strong
growth in their import numbers. According to the International Energy Agency (IEA),
demand for oil in China will grow by 40% and in India by a whopping 55% from 2012 to
2035.

India pays a mammoth $120 – $130 billion per year to import oil, which saw a significant
cut over the past two years thanks to the price crash. In 2015-16, its import bill halved to
just about $64 billion – gaining unprecedented savings for the exchequer. Like Obama
gained from shale while taking office in 2008, Indian Prime Minister Narendra Modi’s
government walked into a crashing oil market when he won a landslide election in 2014,
giving him a much heavier budget to deal with and the cash to launch various schemes
and investment plans in the country.
 Perhaps the time is also ripe for an all-importers answer to OPEC, where the likes of
India, China, Japan and South Korea form a consortium to work on hydrocarbon related
matters together. Of course, the relations between all these states are not ideal, however
the common interest of both access and cost of imported hydrocarbons could create a
certain degree of geo-political assimilation in the region..

This leaves the field ripe for greater Indo-US engagement in energy security and
‘strategic’ energy security, which overlaps with other areas such as common regional
defence and deterrence goals.

India has imported its first shipment of shale oil from the United States. This is a
significant step for India as it will now be less dependent on oil from West Asia, opening
access to more risk-free oil and better prices. Yet concerns remain. India is consuming oil
at a fast rate, while domestic production is falling. It will continue to be dependent on oil
imports for its energy security, and will have to further diversify its sources of oil
imports.

Future Consequences

It would be exceedingly unwise, for US policy-makers to equate an increase in domestic oil

output with a blank check to bully China, Russia and other rivals. The Chinese and Russians
are, in fact, worried about the geopolitical implications of increased US energy output, and are
taking steps to address this concern—the Chinese by importing more oil and gas by land, the
Russians by selling more of their energy to Asia. Neither, however, is likely to be intimidated
by Washington: if anything, they are likely to react antagonistically and to seek means for
countering any perceived US advantage—in ways that could prove highly dangerous for all.
Growing Chinese naval assertiveness in the East and South China seas is one obvious response
to the pivot strategy; stronger military ties between China and Russia are another. In the end,
Washington will find it harder to advance its security interests in these areas, not easier
 However, what is most important is that the American shale-oil boom does not tackle long-term
problems, but only procrastinates them. After all, shale-oil and shale-gas are finite resources
that will eventually deplete. While the current boost in the USA seems to be sustainable, it most
certainly is not. On the contrary, it currently destroys opportunities for the realization of
renewable energy projects, because companies concentrate again on the production of the fossil
resources. In the short run, it may seem easier and more profitable to drill for oil than to fund
research in green energy. Given its limits, however, the USA will only be able to compete
economically, if it continues investing in future technologies despite all short term benefits
resulting from shale-oil and gas.

Beyond economics and politics, environmental and health concerns are often grossly under-
reported when it comes to the narrative of the success of the American shale industry. While the
US has embraced fracking, some countries have opposed it completely, including major
economies in Europe – as the debate around environmental protection and climate change gains
global traction. England, Germany , France ,Bulgaria are a few countries that have ban fracking
due to its ecological disadvantages.

REFERENCES:
1. Walter Levy ,Issues in International Oil, https://www.foreignaffairs.com/articles/1957-
04-01/issues-international-oil-policy, accessed on 18th January 2018

2. Leonardo Maugeri, The Shale Oil Boom : A U.S Phenomenon,

https://www.belfercenter.org/sites/default/files/legacy/files/draft-2.pdf , accessed 14th
January 2018

3. Robert A Manning, Shale Revolution and the New Geopolitics of Energy ,

https://www.files.ethz.ch/isn/185485/Shale_Revolution_and_the_New_Geopolitics_of_E
nergy.pdf , Accessed on 19th January 2018