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Growing Oil Supply To Stabilize And Reduce Oil Prices

The US in 2020 will be the world's largest oil producer. Middle East oil stranglehold is a thing of the past.
By Amiel Ungar
First Publish: 11/14/2012, 7:27 PM

Caspian oil rig
Caspian oil rig
Reuters

The prediction of the Paris-based International Energy Agency that during the first half of the next decade the United States will be the world's largest oil producer. surpassing Russia and Saudi Arabia. represents the culmination of an oil boom.

The Wall Street Journal reacted to the report with an editorial entitled "Saudi America". Neither the US government nor the major oil companies were responsible for this breakthrough, but rather smaller firms in the United States.

The United States will not only no longer have to import energy, but it will return to being an energy exporter. Additionally, natural gas with its low carbon footprint and renewables will help satisfy growing demands for energy.

These revolutionary developments, that could not have been foreseen 5 or 6 years ago, are going to stabilize oil prices and reduce them in real terms. The Financial firm of Goldman Sachs, that had been bullish on oil prices, has bitten the bullet and is now predicting that oil prices are going to decline.

This will have both an economic and a strategic impact on many countries. Canada, that now supplies 30% of US imports and was expecting to reap a bonanza from the Alberta Oil Sands, has woken up to the necessity of finding alternative markets (most likely China) to a United States that will shortly be energy sufficient.

The US can expect to cut its balance of payment deficits and cheaper energy may bring down production costs in the United States and help restore American competitiveness and jobs.

A rationale behind the major deployment of American forces near the Middle East was to ensure the security of the US energy supply. As American dependence on Middle East oil will evaporate, what justification will remain to protect the region at an annual cost of $80 billion? China's dependence on the oil will increase so maybe the Chinese Navy will replace the US 6th Fleet.

The big losers will be countries whose economy essentially floated on oil production and spiraling prices based on predictions of scarcity. While Russia can also apply the new techniques and produce more oil, as this will only increase the glut in oil supplies and further depress prices. The Soviet Union was brought to its knees in the 1980s by the reversal of oil prices. Russia 20 years later is still vulnerable to a reversal of the terms of trade.

Middle Eastern countries will have to cope with the problems of declining revenues combined with a growing population and it's anyone's bed where this will lead.

Overall, the US oil boom is a good thing for a global economy that is fighting its way out of recession, but it is still too early to calculate all of its repercussions.