Windfall

by Meghan L. O'Sullivan

  Just before I had boarded: Meghan L. O’Sullivan, “The Geopolitical Implications of Energy Changes” (presentation, U.S.–China Energy Dialogue, New York, NY, September 12, 2014).

  My Harvard colleague Leonardo Maugeri: Leonardo Maugeri, “Oil: The Next Revolution: The Unprecedented Upsurge of Oil Production Capacity and What It Means for the World,” discussion paper #2012-10, Geopolitics of Energy Project, Belfer Center for Science and International Affairs, Harvard University, Cambridge, MA, 2012, www.belfercenter.org/publication/oil-next-revolution.

  Indeed, it predicted that: Published in May 2014, the International Energy Agency’s World Energy Investment Outlook anticipated that global oil prices would stabilize “around current levels and [increase] only moderately to 2035,” International Energy Agency, World Energy Investment Outlook 2014 (Paris: OECD Publishing, 2014), 55, www.iea.org/publications/freepublications/publication/WEIO2014.pdf.

  Abdalla Salem El-Badri, the secretary general: El-Badri stated, “Today, we see a relatively balanced market. And looking at market indicators, we expect this to be the case for the rest of 2014. There is steady demand growth and enough supply to meet demand, with both stocks and spare capacity at comfortable levels.” He downplayed the potential for new U.S. production to fundamentally challenge the oil market, emphasizing the “ever-expanding demand from Asia” and calling tight oil “a welcome addition [that] adds depth and diversity to the market.” His Excellency Abdalla S. El-Badri, “The New Geography of Energy: Business as Usual or a New Era for Energy Supply and Demand?,” speech, the 14th International Energy Forum, Moscow, Russia, May 15, 2014, www.opec.org/opec_web/en/2815.htm.

  He argued oil markets would: Prince Abdulaziz bin Salman bin Abdulaziz, the Assistant Minister of Petroleum and Mineral Resources, speech, The Conference of the Arabian Gulf and Regional Challenges at The Institute of Diplomatic Studies and the Gulf Research Centre, Riyadh, September 16, 2014, pp. 3–5; quote on page 5.

  Dismissing gyrations in the price of oil: Ibid.

  When I pressed the issue: Between 2000 and 2010, the countries near the Caspian Sea added 1.5 million of additional production. Over a similar time period, Angola added more than 1 million. See “Oil and Natural Gas Production Is Growing in Caspian Sea Region,” U.S. Energy Information Administration, September 11, 2013, www.eia.gov/todayinenergy/detail.cfm?id=12911; and “Angolan Oil Production Has Doubled Since 2013,” U.S. Energy Information Administration, October 14, 2011, www.eia.gov/todayinenergy/detail.cfm?id=3490.

  Energy companies worldwide: The S&P Global Oil Index, which measures the performance of the 120 largest, publicly traded oil and gas companies, was at its lowest levels since 2009 in late 2015. The three worst performers of the S&P 500 in 2015 were all energy companies. Saddled with debt, some U.S. oil and gas companies lost 90 percent of their market value over the course of 2015. See “S&P Global Oil Index,” S&P Dow Jones Indices, September 13, 2016, http://us.spindices.com/indices/equity/sp-global-oil-index; Matt Egan, “These are the worst stocks of 2015,” CNN Money, December 22, 2015, http://money.cnn.com/2015/12/22/investing/worst-stocks-2015-oil-energy/; Christopher Helman, “Oil Goes Down, Bankruptcies Go Up—These 5 Frackers Could Be Next to Fall,” Forbes, August 17, 2015, www.forbes.com/sites/christopherhelman/2015/08/17/as-oil-goes-down-bankruptcies-go-up-these-5-frackers-could-be-the-next-to-fall/#2715e4857a0b56f17add5f33.

  The low price of oil itself: Joe Weisenthal, “BofA: The Oil Crash Is Kicking Off One of the Largest Wealth Transfers in Human History,” Bloomberg, January 31, 2016, www.bloomberg.com/news/articles/2016-02-01/bofa-the-oil-crash-is-kicking-off-one-of-the-largest-wealth-transfers-in-human-history.

  We have begun to see renewables: “International Energy Outlook 2016: Executive Summary,” U.S. Energy Information Administration, May 11, 2016, www.eia.gov/forecasts/ieo/exec_summ.cfm.

  fossil fuels still: This proportion includes coal; without coal, oil and natural gas account for 55 percent of global energy use.

  In a 2014 book, Game Changers: The authors assessed various technologies in each area, evaluating and categorizing them as commercial, near commercialization, or ones in which commercialization is further out. George P. Shultz and Robert C. Armstrong, eds., Game Changers: Energy on the Move (Stanford: Hoover Institution Press, 2014).

  One: Behind the Price Plunge

  In 2005, New York Times columnist John Tierney: “The $10,000 Question,” New York Times, August 23, 2005, www.nytimes.com/2005/08/23/opinion/the-10000-question.html.

  Energy—and increasing competition: National Intelligence Council, Global Trends 2025: A Transformed World (Washington, DC: U.S. Government Printing Office, 2008), www.dni.gov/files/documents/Newsroom/Reports%20and%20Pubs/2025_Global_Trends_Final_Report.pdf.

  In 2008, Nobuo Tanaka: International Energy Agency, World Energy Outlook 2008 (Paris: OECD Publishing, 2008), November 12, 2008, 3, www.worldenergyoutlook.org/media/weowebsite/2008-1994/WE02008.pdf.

  In a similar vein, U.K. defense: Ben Russell and Nigel Morris, “Armed Forces Are Put on Standby to Tackle Threats of Wars over Water,” The Independent, February 27, 2006, www.independent.co.uk/environment/armed-forces-are-put-on-standby-to-tackle-threat-of-wars-over-water-6108139.html. Also see Michael T. Klare, “There Will Be Blood: Political Violence, Regional Warfare, and the Risk of Great-Power Conflict over Contested Energy Sources,” in Energy Security Challenges for the 21st Century: A Reference Handbook, ed. Gal Luft and Anne Korin (Santa Barbara: Praeger, 2009), 61. Klare envisions “a situation where efforts by China to secure access to overseas sources of energy would collide with similar efforts by the United States, producing a direct confrontation between the two.”

  The authors of the Global Trends report: National Intelligence Council, Global Trends 2025: A Transformed World, 47–50.

  In the first decade: Between 2000 and 2011, total nonhydro renewable electricity generation quadrupled, growing at 13 percent annually. BP p.l.c., BP Statistical Review of World Energy 2016 (BP, June 2016), www.bp.com/content/dam/bp/excel/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-workbook.xlsx.

  This support encouraged expansion: See Diane Cardwell, “Solar and Wind Energy Start to Win on Price vs. Conventional Fuels,” New York Times, November 23, 2014, www.nytimes.com/2014/11/24/business/energy-environment-solar-and-wind-start-to-win-on-price-vs-conventional-fuels.html.

  Such growth will continue: International Energy Agency, “IEA raises its five-year renewable growth forecast as 2015 marks record year,” October 25, 2016, www.iea.org/newsroom/news/2016/october/iea-raises-its-five-year-renewable-growth-forecast-as-2015-marks-record-year.html.

  After all, nonhydro renewable energy: Non-hydro renewables accounted for 3.16 percent of global primary energy use in 2016. If one includes hydro in the mix, this percentage is 10.02 in 2016. See BP Statistical Review of World Energy 2017, BP, http://www.bp.com/content/dam/bp/en/corporate/excel/energy-economics/statistical/review-2017/bp-statistical-review-of-world-energy-2017-underpinning-data-xlsx.

  It is the type of extraction process that provides: For example, as recently as when Daniel Yergin wrote The Quest in 2011, many people considered deepwater oil and gas unconventional. Today, few do. See Daniel Yergin, “Unconventional,” in The Quest: Energy, Security, and the Remaking of the Modern World (London: Penguin Books, 2011), 244–65.

  But oil sands, also: Oil can also be produced from oil sands through a mining-type process.

  In 1952, George Mitchell: John Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew: An Oral History and Narrative Overview (Boca Raton: Universal Publishers, 2001), 17–20. See also Gregory Zuckerman, The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (London: Portfolio/Penguin, 2014), 26.

  The natural gas Mitchell initially found: “Before long all the gas above the Barnett Shale was played out,” Mitchell said. Brandon Evans, “Mitchell’s Gamble Changed an Industry, His Philanthropy Changed the Future,” The Cyn
thia & George Mitchell Foundation (blog), July 31, 2013, http://cgmf.org/blog-entry/64/Mitchell’s-gamble-changed-an-industry-his-philanthropy-changed-the-future.html.

  The first reference to them: U.S. Geological Survey National Assessment of Oil and Gas Resources Team, and Laura R. H. Biewick, compiler, “Map of Assessed Shale Gas in the United States” (Reston: U.S. Geological Survey, 2013), 2, http://pubs.usgs.gov/dds/dds-069/dds-069-z/DDS-69-Z_pamphlet.pdf.

  Those cracks are then prised open: See Meagan S. Mauter, Vanessa R. Palmer, Yiqiao Tang, and A. Patrick Behrer, “The Next Frontier in United States Unconventional Shale Gas and Tight Oil Extraction: Strategic Reduction of Environmental Impact,” discussion paper 2013-04, Energy Technology Innovation Policy Research Group, Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University, Cambridge, MA, 2013, http://belfercenter.ksg.harvard.edu/files/mauter-dp-2013-04-final.pdf.

  Well aware of the resources trapped: For more on the U.S. government role, see Alex Trembath et al., “Where the Shale Gas Revolution Came From: Government’s Role in the Development of Hydraulic Fracturing in Shale,” The Breakthrough Institute, May 23, 2012, http://thebreakthrough.org/blog/Where_the_Shale_Gas_Revolution_Came_From.pdf. For more on Mitchell’s own interaction with government programs, see Michael Shellenberger and Ted Nordhaus, “A Boom in Shale Gas? Credit the Feds,” Washington Post, December 16, 2011, www.washingtonpost.com/opinions/a-boom-in-shale-gas-credit-the-feds/2011/12/07/gIQAecFIzO_story.html.

  His heir apparent, Bill Stevens: See Gregory Zuckerman, The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (London: Portfolio/Penguin, 2014), 18.

  Mitchell decreased costs: For a detailed, colorful account of the process of experimentation to find just the right fluid consistency, see ibid., or Gregory Zuckerman, “Breakthrough: The Accidental Discovery That Revolutionized American Energy,” Atlantic, November 6, 2013, www.theatlantic.com/business/archive/2013/11/breakthrough-the-accidental-discovery-that-revolutionized-american-energy/281193/.

  These advances helped coax: “Technology Drives Natural Gas Production Growth from Shale Gas Formations,” U.S. Energy Information Administration, July 12, 2011, www.eia.gov/todayinenergy/detail.cfm?id=2170. This graph also shows how the number of horizontal wells in the Barnett increased after 2003, when Devon purchased Mitchell Energy, and how natural gas production rose significantly from that point onward.

  Devon’s knowledge of horizontal drilling: Mitchell had also experimented with horizontal drilling, but with little positive result. See Zhongmin Wang and Alan Krupnick, “A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?,” RFF discussion paper 13-12, Resources for the Future, Washington, DC, April 2013, 23, www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-13-12.pdf.

  Within a decade, the number: The number of wells increased from 2,070 to 17,980 by 2012. Ibid., 27.

  production of natural gas: Natural gas production in the Barnett grew 834 million cubic feet (MMcf) a day in 2003 to 5,752 MMcf a day in 2012. “Texas Barnett Shale Total Natural Gas Production 2000 Through October 2014,” Railroad Commission of Texas, Dec. 19, 2014, www.rrc.state.tx.us/media/25828/barnettshale_totalnaturalgas_2000102014.pdf.

  Instead, they preferred to: The EIA posits that the Arctic contains an estimated 13 percent of the world’s undiscovered conventional oil resources and 30 percent of its undiscovered conventional natural gas resources. “Arctic Oil and Natural Gas Resources,” U.S. Energy Information Administration, January 20, 2012, www.eia.gov/todayinenergy/detail.php?id-4650.

  That same year, Forbes ranked them: Edwin Durgy, “The Forbes 400’s Newest Undercover Billionaires: The Wilks Brothers,” Forbes, September 26, 2011, www.forbes.com/sites/edwindurgy/2011/09/26/the-forbes-400s-newest-undercover-billionaires-the-wilks-brothers/.

  The collective efforts of dozens: See Leonardo Maugeri, “The Shale Oil Boom: A U.S. Phenomenon,” discussion paper 2013-05, Geopolitics of Energy Project, Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University, Cambridge, MA, 2013, http://belfercenter.ksg.harvard.edu/publication/23191/shale_oil_boom.html.

  In 2006, the United States was producing: “Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays,” U.S. Energy Information Administration, July 8, 2011, https://www.eia.gov/analysis/studies/usshalegas/; “Shale Gas Production,” U.S. Energy Information Administration, November 19, 2015, www.eia.gov/dnav/ng/ng_prod_shalegas_s1_a.htm; “Producing Natural Gas from Shale,” U.S. Department of Energy, January 26, 2012, http://energy.gov/articles/producing-natural-gas-shale.

  By 2015, more than half: John Staub, “The Growth of U.S. Natural Gas: An Uncertain Outlook for U.S. and World Supply,” presentation, U.S. Energy Information Administration Conference, Washington, DC, June 15, 2015, slide 3, www.eia.gov/conference/2015/pdf/presentations/staub.pdf.

  Production of tight oil in the Eagle Ford: The production from Eagle Ford increased from 54,011 barrels a day (b/d) to 1,285,224 b/d during this period. U.S. Energy Information Administration, “Drilling Productivity Report,” September 2016.

  Tight oil production in the Bakken fields: Bakken production grew from 132,106 b/d in January 2007 to 1,050,512 b/d in January 2014. Ibid.

  In 2014, U.S. tight oil production: “Table: Oil and Gas Supply,” Annual Energy Outlook 2017, U.S. Energy Information Administration, https://www.eia.gov/outlooks/aeo/data/browser/#/?id=14-AEO2017®ion=0-0&cases=ref2017&start=2015&end=2050&f=A&linechart=~ref2017-d120816a.10-14-AEO2017&ctype=linechart&sid=ref2017-d120816a.10-14-AEO2017&sourcekey=o. “Production of Crude Oil, NGPL, and Other Liquids 2013,” U.S. Energy Information Administration, 2013, https://www.eia.gov/beta/international/data/browser/#?iso=IRQ&c=0000000000000000000001&ct=0&ord=CR&cy=2015&v=H&vo=0&so=0&io=0&start=1980&end=2015&vs=INTL.55-1-IRQ-TBPD.A&pa=0000000000000000000000000000000000bg&f=A&ug=g&tl_type=p&tl_id=5-A.

  In the same year: “Tight Oil Production Pushes U.S. Crude Supply to Over 10% of World Total,” U.S. Energy Information Administration, March 26, 2014, www.eia.gov/todayinenergy/detail.cfm?id=15571.

  Accounting for nearly half: Ibid.

  An additional 4.9 million barrels: “Tight oil expected to make up most of U.S. oil production increase through 2040,” U.S. Energy Information Administration, February 13, 2017, https://www.eia.gov/todayinenergy/detail.php?id=29932; “Oil Market Report,” International Energy Agency, March 11, 2016, www.iea.org/media/omrreports/tables/2016-03-11.pdf.

  For instance, in 2005: “Special Report: Hurricane Katrina’s Impact on the U.S. Oil and Natural Gas Markets,” U.S. Energy Information Administration, August 31, 2005, www.eia.gov/special/disruptions/hurricane/katrina/eia1_katrina_090205.html; “Cushing, OK WTI Spot Price FOB,” U.S. Energy Information Administration, February 1, 2017, https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=rwtc&f=D.

  Global demand for oil decreased: Global oil demand decreased from 64 mnb/d in 1979 to 58 mnb/d in 1983. BP Statistical Review of World Energy 2017, BP.

  In the first half of the 1980s: Mexico, the U.K., Norway, China, Brazil, and India together increased their production by 63 percent during this time period. This 3.9 million barrels accounted for roughly 6 percent of global crude production in 1980. “International Energy Statistics,” U.S. Energy Information Administration, www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=55&aid=1&cid=regions&syid=1980&eyid=2013&unit=TBPD.

  Saudi Arabia bore the brunt: In 1985, Saudi Arabia was producing at 37 percent of its 1979 levels. Interestingly, OPEC slashed production by significantly more than non-OPEC country increases, but the price still went down. BP Statistical Review of World Energy, BP.

  Revenues had plunged: Revenues declined from $108.2 billion in 1981–82 to $48 billion in 1984–85. See Eliyahu Kanovsky, Saudi Arabia’s Dismal Economic Future: Regional and Global Implications, Dayan Anter for Middle Eastern and African Studies, The Shiloah Institute (Tel Aviv University, 1984), 34.

&
nbsp; Faced with declining prices: James M. Griffin and Wiewen Xiong, “The Incentive to Cheat: An Empirical Analysis of OPEC,” The Journal of Law & Economics 40, no. 2 (1997): 306.

  Prices, which had tumbled: By 1986, oil prices had plunged to $13.60 a barrel from $21.60 seven years earlier. OPEC’s share of the global market had shrunk from 41 percent of the global market to just 28 percent. BP Statistical Review 2016. www.bp.com/content/dam/bp/excel/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-workbook.xlsx, and “Real Prices Viewer,” U.S. Energy Information Administration, September 7, 2016, www.eia.gov/forecasts/steo/realprices/.

  In late 1984, the government raised: Kanovsky, Saudi Arabia’s Dismal Economic Future: Regional and Global Implications, 235.

  In early 1986, the Economist noted: Ibid., 298; Economist, “GCC Survey,” February 8, 1986, 18.

  After meeting with U.S. energy secretary: “Shale energy boom helps keep oil markets stable,” Arab News, January 20, 2014, www.arabnews.com/news/511951.

  While global demand for oil: “Oil Market Report,” International Energy Agency, March 11, 2016, https://www.iea.org/media/omrreports/tables/2016-03-11.pdf.

  it was initially weakening demand: In September 2013, Saudi exports were at 7.8 mnb/d. In September 2014, that same number declined to 6.7 mnb/d. For Saudi exports, see “JODI-Oil,” Joint Organization Data Initiative, www.jodidb.org/ReportFolders/reportFolders.aspx?sCS_referer=&sCS_ChosenLang=en.

  These countries aggressively began: For details, see Anjli Raval, “The Big Drop: Riyadh’s Oil Gamble,” Financial Times, March 9, 2015, www.ft.com/intl/cms/s/2/25f2d7d6-c3f8-11e4-a02e-00144feab7de.html#axzz45VgynGqP.

  In the eighteen months following January: Chinese imports of Saudi crude fell from 1.3 mnb/d in January 2013 to 900,000 b/d in August 2014. Ibid.