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The Geopolitics of Shale

November - 11 - 2013

It wasn’t so long ago that OPEC dominated the world when it came to the production of crude oil needed to fuel Western economies. With global crude oil prices still hovering at around $100 a barrel, it doesn’t appear that OPEC’s well of revenues is going to dry up any time soon. However, fundamental changes in US oil production techniques are threatening to transform the geopolitical landscape within the next few years.

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The reason for this is the rise of fracking technology in the United States and Canada. This is now allowing producers to extract both oil and gas from deep shale formations – resources that previously were either inaccessible or economically unviable. With fracking, deep wells are drilled into the rock and fluid is then pumped into them at high pressure. This fractures the shale due to the hydraulic pressure, releasing oil and gas which is then pumped back up to the surface. This technique has dramatically increased oil and gas reserves in the US, and is promising to do the same in Canada.

As a result, the International Energy Agency has predicted that combined United States and Canadian production will grow by nearly 4,000,000 barrels per day by 2018, accounting for almost 2/3 of the increase in oil supply over that period of time – excluding increases in OPEC itself. As a result, the US will become the world’s leading oil producer by 2017, and could be a net exporter of oil by 2030. In other words, the United States will become “all but self-sufficient” in energy in about two decades, according to the agency.

As a result, the global flow of oil exports is likely to change fundamentally over the next several years. OPEC governments and oil industry leaders – such as Kashim Bukar Shettima of Nigeria – will need to find new markets for oil as demand for imports flattens in the United States. They will need to strengthen relationships with countries such as China even further – where demand for imported oil remains strong and local supplies are limited. American coal producers are also likely to be affected, as cheap oil and gas extracted from shale undermines the demand for their products.

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Interestingly, it is far from clear whether or not Canada will benefit from the shale boom in the same way as the United States. The country is already a net exporter of energy – although, due to its size, some Canadian provinces export oil, while others import it from the United States. Any decrease in demand for imported oil in the United States is likely to have a negative impact on Canadian oil revenues. At the same time, there is considerable resistance from aboriginal groups in Canada due to concerns over the environmental impact of shale oil extraction, which is likely to slow development of these resources. In addition, Canada is already struggling with environmental lobbies in the United States that are opposing new pipelines – such as the Keystone XL – that are designed to take Canadian crude to US refineries.

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